Frac Spread: Resolution To Trade War Would Help NGL Prices, Margins

Mont Belvieu, Texas, ethane dropped to a nine-month low in the past week as bloated inventories of ethylene forced flexi-crackers to reduce operating rates.

NGL prices were down almost across the board and all margins narrowed in the five-day average.

Relief is expected in the second half of this year when a wave of new ethane cracking capacity comes online, said EnVantage Inc. Until then, a price boost will hinge on the ability of negotiators to resolve trade differences between the U.S. and China, presumably prompting China to again import U.S. polyethylene.

At their December meeting in Buenos Aires, Chinese President Xi Jinping proposed to President Donald Trump that his country buy more energy products as part of a deal, an offer that would conceivably narrow the trade gap that set a record of $419.2 billion in 2018. China’s legislature was also prepared to pass a law discouraging officials from demanding that U.S. companies hand over technology as the price of doing business.

U.S. Trade Representative Robert Lighthizer expressed doubt about promises made and not kept by the Chinese government during recent testimony to Congress. He said he was unable to point to many instances in which Beijing lived up to its obligations—not a good starting point for achieving a meaningful trade agreement, or any kind of agreement.

Clearly, an enforcement mechanism would be needed to ensure China kept its word, but good luck coming up with one that meets with Beijing’s approval. And if the agreement is violated, what then? More tariffs?

In addition to failing to provide the Trump administration with leverage in its trade talks, the tariffs have resulted in reduced spending on heavy equipment by U.S. companies, and increased expenses for businesses and consumers of $4.4 billion per month by the end of 2018. It’s also created a fog of uncertainty for investors.

Senior U.S. officials maintain that progress has been made in the trade talks and there are reports that Trump and Xi could meet at Trump’s Mar-A-Lago resort in Florida at the end of March to formalize a deal. As the president is wont to say, we’ll see what happens.

Mont Belvieu propane’s price returned to below 70 cents per gallon (gal) last week, with its margin narrowing by 7.3%. The price is 6.5% lower than it was at this time in 2018.

Only pentanes-plus enjoyed a strong week, with its price hitting 15-week highs at both Mont Belvieu and Conway, Kan. However, while the Mont Belvieu margin was little changed, Conway’s narrowed by 17.3% over the previous week. The Mont Belvieu price was 15.1% below last year’s at this time, and Conway’s was 17.6% lower.

Margin differentials for pentanes-plus were even more pronounced. Mont Belvieu’s margin decreased by 20.6%, while Conway’s was down 41.8%.

The hypothetical NGL barrel held steady in the last week at Conway and gave up $1 at Mont Belvieu. Compared to 12 months ago, Mont Belvieu’s price is 7.7% lower but its margin has contracted by 14.6%. Conway’s price is down 5.9% but its margin has been squeezed by 54%.

In the week ended March 1, storage of natural gas in the Lower 48 experienced a decrease of 149 billion cubic feet (Bcf), the EIA reported, compared to the Stratas Advisors prediction of a 137 Bcf withdrawal and the Bloomberg consensus of a 143 Bcf withdrawal. The figure resulted in a total of 1.39 trillion cubic feet (Tcf). That is 14.9% below the 1.633 Tcf figure at the same time in 2018 and 25% below the five-year average of 1.854 Tcf.