Although the natural gas market remains oversupplied, it has been gaining strength this year as electric generation demand is expected to continue to grow in the years ahead. This has caused prices to increase as producers have been hedging production at its highest rate in three years.

Also helping to support gas prices has been crude oil price hedges as a great deal of gas production from shale plays has been from associated gas. By encouraging the continued production at steady prices, gas has been able to garner solid prices moving forward.

According to a recent research note from Barclays Capital, producers have hedged 55% of their gas production as of September. This represents a 3% increase over the previous year. Looking ahead to 2014, gas hedging has increased 5% from the same time this year. Meanwhile, crude hedging is the highest it has been in the past six years.

The increase in gas prices has resulted in a push back on natural gas liquid (NGL) frac spread margins for much of this year, especially in the case of ethane, which has had a negative margin for nearly all of 2013.

This situation had a bit of a reverse this week as NGL prices continued to benefit from improved demand as the heating season and winter-grade gasoline production began and liquefied petroleum gas (LPG) export capacity has increased. NGL prices improved at both hubs, with the notable exception of Conway ethane. At the same time, gas prices took a bit of a dip due to increased storage levels.

According to the latest information from the Energy Information Administration, gas in storage levels rose 87 billion cubic feet to 3.741 trillion cubic feet (Tcf) the week of October 18 from 3.654 Tcf the week before. This was 2% below the 3.833 Tcf figure posted last year at the same time and 2% greater than the five-year average of 3.664 Tcf.

Consequently gas prices dropped 3% to $3.72 per million Btu (MMBtu) at Conway and 4% to $3.65 per MMBtu at Mont Belvieu. “While planned maintenance at some of the nation’s nuclear-power plants and cold weather should lend some support to prices, many traders still remain skeptical of any prolonged upside momentum until real winter temperatures arrive, noting comfortable inventories and near-record production,” according to Hart Energy’s Commodities Report.

These real winter temperatures are expected to be held off at least another week as the National Weather Service’s forecast for next week anticipates normal late-fall temperatures for much of the country. This will cause some heating demand increases, but not likely enough to give a real push to gas prices.

The Conway NGL market saw both the largest increase and the largest decrease in prices this past week as ethane dropped 7% to 21 cents per gallon due to a total lack of support for the product at the hub combined with high supply levels. Isobutane prices increased 5% to $1.64 per gallon,their highest level since early February, as isomerization capacity at the hub has been throttled back once again. We are unsure as we went to press whether this situation was due to a maintenance outage or market participants attempting to create better balance.

Mont Belvieu ethane rose 1% to 26 cents per gallon as petrochemical demand along the Gulf Coast has been increasing along with improved macroeconomic drivers. This was the hub’s highest price in nearly two months. Isobutane experienced solid gains at the hub – increasing 2% – but remained below its Conway counterpart as the market remains better supplied with steady capacity. The price of $1.56 per gallon was the highest at Mont Belvieu since late February.

Aside from Conway isobutane, propane had the strongest performance of any NGL this week as the Mont Belvieu price rose 2% to $1.16 per gallon This was its highest price since it was the same level the week of April 25, 2012. It appears that forecasts that stated propane was likely to reach its five-year averages in October were on the money as LPG exports have helped work the storage overhang off. The Conway price also rose 2% and reached their highest level since early March 2012 when they were the same $1.12 per gallon level they were this week.

The theoretical NGL barrel (bbl.) price increased 2% at both hubs with the Conway price increasing to $43.33 per bbl. with a 4% increase in margin to $29.74 per bbl. and the Mont Belvieu price rising to $44.56 per bbl. with a 5% increase in margin to $31.23 per bbl.

The most profitable NGL to make at both hubs remained C5+ at $1.68 per gallon at Conway and $1.75 per gallon at Mont Belvieu. This was followed, in order, by isobutane at $1.27 per gallon at Conway and $1.19 per gallon at Mont Belvieu; butane at $1.15 per gallon at Conway and $1.16 per gallon at Conway; propane at 77 cents per gallon at Conway and 83 cents per gallon at Mont Belvieu; and ethane at negative 4 cents per gallon at Conway and 2 cents per gallon at Mont Belvieu.

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