Crude prices experienced another decline the first full week of April as inventory levels remain high, but there was some optimism surrounding the market once again as the U.S. Energy Information Administration (EIA) announced a nearly 5 million barrel (bbl) decline.

This unexpected decline was a result of improved refining demand being created by lower prices as well as a decrease in crude imports. The decline was the first in two months, but the larger issue is that crude inventories hit their all-time high of just under 535 million bbl the previous week. While a decline is good news for the market, it will take several weeks, and ideally months, of declines for the market to show signs of a long-term recovery.

Supplies are expected to decline in the coming months, though it is difficult to pin down how quickly and deeply these declines will occur. Much has been made of Iranian and Iraqi production impending return to market, but what have largely been overlooked have been other supply disruptions in other parts of the world. The return of production to the market from outages in Nigeria, Saudi Arabia, Kuwait, Libya and Colombia are complicating the impact that a potential freeze agreement will have on prices.

“Combined unplanned supply outages have persisted for several quarters now. What makes Q2 2016 stand out in terms of these barrels returning is that participants to the process will see an incentive to produce as much as possible before a freeze agreement might take hold,” Barclays Capital said in an April 4 research note. Should enough production come back online before a freeze agreement takes place it could provide yet another headwind to an already uncertain market.

It’s long been assumed that a recovery in crude prices will lead the way to a recovery in NGL and natural gas prices, but that may not prove to be the case. Currently gas prices are struggling at $1.78 per million Btu (/MMBtu) at Conway, Kan., and $1.90/MMBtu at Mont Belvieu, Texas. However, EIA data has shown that gas production has been holding firm at more than 1 billion cubic feet per day (Bcf/d) less than the Sept. 2015 peak.

At the same time, LNG exports and export demand to Mexico are expected to increase in the coming 6 to 18 months as new infrastructure is brought online and recently completed infrastructure is optimized. Cooling demand should also pick up with a warmer-than-normal summer and further coal-to-gas power generation switching.

As demand increases, supply has also been decreasing since Oct. 2015 with reduced drilling and dwindling imports. It is unlikely that the U.S. dry gas rig count will increase until prices reach $3.00/MMBtu, according to Stratas Advisors.

The EIA reported there will be a supply deficit by November and this should help push gas prices higher, possibly even double their current level. It was noted by Forbes that gas prices averaged more than $4.00/MMBtu during the last supply deficit that ran from Dec. 2012 to Nov. 2014.

Improved gas prices should help support the light portion of the NGL bbl as ethane’s ceiling will increase along with gas prices. This may have a short-term negative impact on frac spread margins as gas feedstock prices could turn margins negative until they reach 30 cents per gallon (/gal) or more.

Ethane margins are currently positive, though only on a theoretical basis at Conway with prices falling for the past three weeks at the hub. The Conway price of 13 cents/gal is the lowest price since the first week of March. The Mont Belvieu price is stronger in value, but experienced a larger decrease as it fell 8% to 17 cents/gal, which was also the lowest price since the first week of March. Since the floor for NGL prices is set by the ceiling of the next lowest NGL in the bbl, the rest of the bbl would also stand to improve.

Currently the theoretical NGL bbl price is on the low end for the past decade with a value of $16.67/bbl at Conway and $17.99/bbl at Mont Belvieu. The margins for these values also fell significantly the past week as it was down 6% to $11.05/bbl at Mont Belvieu and down 2% to $10.17/bbl at Conway.

The most valuable NGL to make remained C5+ at 68 cents/gal at Conway and Mont Belvieu. This was followed, in order, by isobutane at 40 cents/gal at Conway and 35 cents/gal at Mont Belvieu; butane at 29 cents/gal at Conway and 32 cents/gal at Mont Belvieu; propane at 23 cents/gal at Conway and 26 cents/gal at Mont Belvieu; and ethane at 1 cent/gal at Conway and 5 cents/gal at Mont Belvieu.

Natural gas storage levels increased slightly the week of April 1 with the EIA reporting a 12 Bcf increase to 2.48 trillion cubic feet (Tcf) from the previous week. This was 69% greater than the 1.472 Tcf figure posted last year at the same time and 54% greater than the five-year average of 1.606 Tcf.

Frank Nieto can be reached at fnieto@hartenergy.com.

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