Propane prices and frac spread margins have turned the corner this summer as export demand has been increasing, slowly working off the storage overhang. This is also having a positive impact on ethane, which has a large correlation with propane, especially in the Midcontinent, where only E-P mix is traded.
The reason for these increases is not only related to the increased liquefied petroleum gas (LPG) export capacity and demand levels, but also reflects traders gearing up for a strong crop drying season as well as an approaching heating season.
Both should be stronger than they were in 2012 when a late winter delayed heating demand while also pushing back crop drying season to be nearly non-existent.
These improvements helped ethane prices gain slight momentum in a very weak market as the season drew to a close, even as a series of unplanned cracker outages hit the market. Six crackers representing just more than 9 billion pounds per year of capacity, or approximately 16% of total domestic cracking capacity, were taken down in late August.
The bulk of these facilities were expected to be returned to service shortly after we went to press. It is likely that the impacts will be minimal, at best, to prices and margins, and they shouldn’t experience dramatic decreases should these schedules hold. However, a sustained improvement is unlikely through the remainder of 2013 as there are too many other headwinds facing the market. Despite price improvements, ethane margins remained negative at Conway, Kansas, and only theoretically positive at Mont Belvieu, Texas.
These price improvements are not larger because inventory levels are near record highs, and the market has largely explored all near-term options for relief. These have included moving volumes out of the Conway market to Sarnia, Ontario, and Mont Belvieu. Although some relief will come from ethane cracking capacity being brought back online throughout the remainder of the year, other crackers will be undergoing planned maintenance of their own. This means that storage could build or remain static at best for the remainder of 2013.
Heavy natural gas liquids prices and margins also improved as the summer drew to a close as the U.S. job market and overall economy saw improvements, which gave additional support for crude prices. In addition, refiners began to switch from making summer-grade gasoline to making winter-grade gasoline, which increased demand for butane and isobutane.
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