Frac Spread: Yes Sir, Uncertainty Is Certainly Certain

Global stability in oil and gas commodity pricing will remain elusive until the market understands how the U.S. shale industry responds to price signals, Ernst & Young’s (EY) Adi Karev said in a report outlining themes in second-quarter earnings.

The Hong Kong-based global sector leader for oil and gas wasn’t recommending the abandonment of capitalism and installation of a U.S. government-run national oil company to enable easier price modeling, but he was making a point about how unplanned supply disruptions were on the rise during the quarter. Among those he cited:

• Cuts in opex and capex;
• A lack of OPEC cohesion; and
• Geopolitical events, which include wars and terror incidents.

“Most companies remain committed to preserving the dividend,” Karev wrote. “Although at US$40 oil, cash flows generated may not be enough to fund the dividend and maintain capital investment.”

Uncertainty is inherent in the adoption of disruptive technologies like the combination of hydraulic fracturing and horizontal drilling that drove the shale boom. The difference is that the descriptive word as price and production soared was promising. When the cycle heads south, it becomes a word we’re not supposed to say when the kids are around.

For NGL, which keep pace with crude oil prices, prices during the summer shoulder season remain in limbo—higher than last week; not as high as three weeks ago.

With the exception of C₅₊, which rose 7.5% in the past week and is now up 19.1% since the start of August at Mont Belvieu, Texas, there is not a lot of movement. At Conway, Kan., C₅₊ increased by 9% in the past week and 16.1% for the month so far.

Storage levels of natural gas continue to grow. The U.S. Energy Information Administration (EIA) reported an increase of 22 billion cubic feet (Bcf) for the week ending Aug. 12, shy of the Bloomberg consensus 27 Bcf.

The total of 3.339 Tcf surpasses the total in storage at this time in 2015 by 10.9%, and is 13.8% above the five-year average of 2011-2015, which was 2.934 Tcf.

Ethane at Mont Belvieu slid for the second straight week, dropping below 17 cents per gallon (gal) for the first time since early March. The price difference between the two hubs narrowed, with ethane rising for the third straight week at Conway to a point not seen since the beginning of July.

Compared to last year at this time, Conway’s ethane price is little changed, but Mont Belvieu’s price is down by 11%.

Propane’s weekly price has remained below 50 cents/gal at both hubs for the past six weeks, and under 40 cents/gal at Conway for the last three. The price of propane has stayed under 50 cents/gal since the end of May, or 11 weeks in a row.

Butane continued to languish below 60 cents/gal for the fifth consecutive week at both hubs, with isobutane remaining below 70 cents/gal for the sixth straight week at Conway and seventh straight week at Mont Belvieu. The peak price for 2016 for isobutane was set in late June.

Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman.