Gas Storage Levels To Grow As Mild Winter Continues

Frac spread margins largely took a downturn this week at both hubs as natural gas liquid (NGL) prices were down and natural gas prices improved at Conway and remained flat at Mont Belvieu. Natural gas prices were $2.95 per million Btu at both Conway and Mont Belvieu. This represented a 5% increase at Conway and a 1% drop at Mont Belvieu.

Only C₅₊ and Conway ethane margins improved this week. This was not a surprise given that these were also the only NGL to experience price improvements. The largest improvement in margin was for Conway ethane at 10%. This improvement strengthened the NGL’s profitability at the hub, which had been treading dangerously close to a price that would cause it to be rejected.

The largest drop in margin at both hubs was for propane, which was down 13% at Conway and 5% at Mont Belvieu. Margins were negatively impacted by the price decrease for the product because of the mild winter being experienced throughout the country that is causing heating demand levels to be quite low.

Isobutane had the second largest decrease in margin at both hubs due to a decrease in alkylation demand. The Conway margin dropped 13% from the previous week while the Mont Belvieu frac spread was down 4%. These decreases, combined with the 5% gain in margin for C₅₊ at Conway and the 3% gain at Mont Belvieu, resulted in C₅₊ regaining its status as the most profitable NGL after isobutane had held this position for much of the past two months.

The margin for C₅₊ was $1.75 per gallon (/gal) at Conway and $2.03/gal at Mont Belvieu. This was followed, in order, by isobutane at $1.65/gal at Conway and $2.03/gal at Mont Belvieu; butane at $1.54/gal at Conway and $1.75/gal at Mont Belvieu; propane at 77¢/gal at Conway and $1.06/gal at Mont Belvieu; and ethane at 12¢/gal at Conway and 57¢/gal at Mont Belvieu.

Natural gas in storage for the week of Jan. 6, the most recent data available from the Energy Information Administration, was 3.377 trillion cubic feet (Tcf). This was 95 billion cubic feet below the 3.472 Tcf reported the previous week and 13% greater than the 2.979 Tcf reported last year at the same time. It was also 17% greater than the five-year average of 2.886 Tcf.

It is becoming increasingly difficult for excess storage to be worked off, even with a sustained cold front, because of its overwhelming size. Producers are not expected to have a major decrease in their production levels for 2012, which will put further pressure on the forward curve.

This mild winter being experienced throughout the country will extend itself by another week as the National Weather Service’s forecast for the third week of January is calling for warmer temperatures throughout the bulk of the U.S. This warmer than normal weather will extend from the Southwest through the Gulf Coast and Midwest and along the East Coast. Only the upper Northern parts of the Midwest and West Coast are expected to experience colder than normal temperatures.