The cautious optimism that surrounded the commodities markets at the start of summer has completely disappeared as Labor Day approaches. Not only have West Texas Intermediate (WTI) crude oil prices lost about $20 per barrel (/bbl) in value in this time, but the U.S. stock market has experienced heavy volatility that is further influencing prices.

After a severe plunge to start the week of Aug. 24, markets have swung back up as the Dow posted its best ever two-day gain with energy stocks benefitting from this upswing as they posted some of the biggest gains. This resulted in WTI crude moving from below $40/bbl to more than $40/bbl after posting a 10% gain on Aug. 27. Though this is undoubtedly a positive, WTI crude prices could remain challenged as refineries undergo maintenance ahead of winter-blending.

In addition, the stock market could see further volatility as the Chinese economy may face further uncertainty. On the flip side, should economic and political uncertainties crop up in one or more OPEC member countries it is likely that crude prices will improve as fears of supply shortages arise.

According to The New York Times, these fears are strongest in Venezuela, Nigeria, Angola, Libya, Algeria and Iraq since oil makes up an overwhelming majority of their export output. These countries are finding it difficult to maintain their social programs with prices below $100/bbl, much less current levels.

U.S. producers would benefit under this scenario as prices would encourage increased production, though the ban on crude exports will obviously limit the available markets. There were gains made on this front as the U.S. Department of Commerce announced it will allow the exchange of 100,000 bbl/d of Mexican heavy crude for U.S. light crude. Similar to U.S. officials allowing some condensate exports last year, this policy won’t significantly alter markets, but it will likely create modest gains and could lead to further relaxing of export regulations.

“[T]his move will add modest support to U.S. crude prices relative to international levels by reducing the risk of price disconnects,” PIRA said in an Aug. 25 research note. “A lighter crude slate in Mexico increases light product yields and allows for somewhat higher runs. In our view, this development represents another incremental step toward easing restrictions on U.S. crude oil exports, but not a fundamental change in policy.”

Though this is a bright spot in the long term, the current crude price downturn had a major impact on heavy NGL prices this week as C5+ prices were below 90 cents per gallon (/gal) at both hubs. This was their lowest levels since the start of 2009 when all commodity and financial markets were dealing with the impact of the recession.

The drop in butane prices and its sister product isobutane were not as noteworthy as they fell to their lowest levels in a month, but this is more reflective of how weak the butane/isobutane market has been since the crude downturn. Both products have been hovering in the 40-50 cents/gal range all summer long compared to $1.20+/gal last year at the same time.

Ethane and propane fell at similar rates at both hubs, but overall prices remained within the range they’ve been trading at for the past month. Although ethane is now the third most favored ethylene feedstock after butane and propane, it is continuing to benefit from the reduced capability that the petrochemical industry has to switch from ethane to heavier feedstocks.

The relative strength of propane is surprising given that storage levels are at record levels, and the export arbitrage is beginning to suffer as lower Brent crude prices are making naphtha more attractive for European crackers. PIRA Energy reported that U.S. waterborne LPG exports fell 45%. If LPG exports continue to slump, propane prices could get much closer to ethane prices.

Propane margins are already approaching ethane margins levels not long before they entered their current negative state, which has been the norm for the past several years. Should propane fall to negative margins, it is unlikely it would last as long as the ethane downturn has for the simple reason that heating demand is slowly but surely coming.

Heating season can’t come fast enough for the industry as evidenced by the further erosion of the theoretical NGL bbl, which declined 5% at both hubs. The Conway price was $16.26/bbl with a 7% decline in margin to $7.02/bbl while the Mont Belvieu price was $17.27/bbl with a 9% drop in margin to $7.67/bbl.

The most profitable NGL to make at both hubs was C5+ at 60 cents/gal at Conway and 61 cents/gal at Mont Belvieu. This was followed, in order, by isobutane at 27 cents/gal at Conway and 25 cents/gal at Mont Belvieu; butane at 18 cents/gal at Conway and 22 cents/gal at Mont Belvieu; propane at 10 cents/gal at Conway and 13 cents/gal at Mont Belvieu; and ethane at negative 1 cent/gal at Conway and 1 cent/gal at Mont Belvieu.

The U.S. Energy Information Administration reported that gas storage levels increased by 69 billion cubic feet to 3.099 trillion cubic feet (Tcf) the week of Aug. 21 from 3.03 Tcf the previous week. This was 18% higher than the 2.619 Tcf figure posted last year at the same time and 3% higher than the five-year average of 3.011 Tcf. Cooling demand should be increased the first week of September as the National Weather Service anticipates warmer-than-normal temperatures throughout most of the country.

Comments