Frac Spread: Surprising Inventory Declines Improving Prices

NGL prices surprisingly continued to improve on the back of some positive news, led by declines in U.S. crude and propane inventory levels. Propane stock levels were reported to have fallen by 710,000 barrels (bbl) to just under 93 million bbl, while crude stocks fell for the second straight week.

This helped raise propane prices 5% to 46 cents per gallon (/gal) at Mont Belvieu, its highest price since mid-May, and 4% to 44 cents/gal at Conway, its highest level since the last week of April. Propane also continues to benefit from consumers securing early supplies at attractive prices ahead of the demand season.

Not all of the news was rosy as propane is still expected to hit a record level this fall, which will limit the growth that prices can achieve this heating and crop-drying season. In addition, demand for crude and NGL volumes may be hampered by underachievement out of China as it was reported that September manufacturing activity fell to a six-and-a-half year low.

The stability in West Texas Intermediate (WTI) crude prices that have kept them in the mid-$40/bbl range for the past month is also having a positive impact on heavy NGL prices with butane and isobutane values increasing at both hubs. The Conway C5+ price rose 1%, but the Mont Belvieu price was down slightly this week.

Ethane remains perhaps the NGL with the most positive outlook going forward as prices and frac spread margins continue to slowly improve. The Mont Belvieu price increased 1% to 19 cents/gal, its highest price in six weeks, and boasted a marginally positive frac spread margin for the sixth straight week. Conway margins have improved to a nil value. Clearly there is much more room for improvement in the market, but with inventory levels decreasing it is likely that improved prices are on the way.

While the ethane market is set for improvement, the natural gas will likely face some headwinds this winter. According to Barclays Capital, the oversupplied global LNG market will make New England home to the highest premium for natural gas globally. However, the investment firm warned in its Sept. 18 Gas and Power Kaleidoscope that this region could also become oversupplied this winter due to increased cargo deliveries.

“We think the market is focusing on continued pipeline constraints into [New England] and not factoring in increased LNG imports and potentially lower residential and commercial demand as meteorologists call for a more mild winter… If winter demand does not materialize, pipeline volumes and LNG will be competing for limited premium demand,” the report said. Barclays Capital noted that it was likely that New England prices would still trade at a premium to Henry Hub this winter, but at levels below those from the past few winters.

This does not bode well for the short- to mid-term if the most bottlenecked demand center in the world can be facing an oversupply of natural gas this winter. Long-term, gas demand will grow and the U.S. LNG segment will help to meet many of these demands, but the introduction of increased LNG export capacity in the next year may take longer to balance the gas market.

As gas prices continue to stutter along, the theoretical NGL bbl value grows incrementally with the Conway and Mont Belvieu price up 3% each. The Conway bbl was $18.95/bbl with a 9% gain in margin to $9.78/bbl, while the Mont Belvieu price was $19.62/bbl with a 9% gain in margin to $10.42/bbl.

The most profitable NGL to make at both hubs was C5+ at 69 cents/gal at both hubs. This was followed, in order, by isobutane at 37 cents/gal at Conway and 35 cents/gal at Mont Belvieu; butane at 28 cents/gal at Conway and 33 cents/gal at Mont Belvieu; propane at 21 cents/gal at Conway and 23 cents/gal at Mont Belvieu; and ethane at nil at Conway and 2 cents/gal at Mont Belvieu.

The U.S. Energy Information Administration reported that the natural gas storage injection rate was high the week of Sept. 18 as it increased 106 billion cubic feet to 3.44 trillion cubic feet (Tcf) to 3.334 Tcf the previous week. This was 16% greater than the 2.974 Tcf posted last year at the same time and 5% higher than the five-year average of 3.292 Tcf.