Lower Gas Prices Help Frac Spread Margins Improve

Frac spread margins for natural gas liquids (NGLs) improved across the board the first week of December as natural gas prices fell while NGL prices were largely stable.

The price of natural gas fell 14% to $3.18 per million Btu (/MMBtu) at Conway and 11% to $3.26/MMBtu at Mont Belvieu as the prompt contract dropped as temperatures were higher than normal last week.

In addition, the abnormal storage injection the prior week pushed prices down. According to Barclays Capital, the near-term forward curve is also decreasing in value as the aggregate temperatures for December are expected to be lower than normal.

“Unless weather patterns return to normal again, prices are likely to stay low or come off even more in the near-term, as more than half of the current year-on-year shortfall in nuclear generation is expected to reverse in December, lending less support to natural gas power burn,” the investment firm said in its Gas and Power Kaleidoscope for the week of December 6, 2012. The long-term outlook for natural gas remains more positive, as 2013 prices are expected to exceed $4.00/MMBtu.

It is unlikely that this year’s winter will be as warm as last year’s, but another warm winter would have an extremely adverse effect on both natural gas and NGL prices as demand would be much lower and storage levels continue to remain at high levels.

The good news in terms of storage is that there was a 73 billion cubic feet withdrawal the week of November 30, according to the Energy Information Administration. However, the storage level was still above 3.8 trillion cubic feet (Tcf) at 3.804 Tcf. This was just 1% lower than the 3.837 Tcf figure posted last year at the same time and 5% greater than the five-year average of 3.636 Tcf.

The bad news is that the National Weather Service is forecasting much warmer-than normal-temperatures in the Eastern portion of the United States. This warm weather is expected to stretch from the Northeast down to Florida and through the Southeast into the Gulf Coast. The Pacific Northwest and portions of the Midwest are expected to experience colder than normal temperatures.

Although frac spread margins for NGLs were up across the board last week, NGL prices were primarily down at both Conway and Mont Belvieu. The biggest decreases were for ethane, which dropped 8% at Mont Belvieu and 5% at Conway. The Mont Belvieu price of 25¢ per gallon (/gal) was the hub’s lowest in more than seven years. The Conway price of 19¢/gal was the lowest in a month.

The ethane market is oversupplied, and cracking capacity remains constrained. This situation isn’t expected to improve until well into 2013, which will continue to put prices under pressure.

Propane prices fell 2% at both hubs as heating demand remains weak in much of the U.S. The Mont Belvieu price of 83¢/gal was the lowest at the hub since the week of July 4 when it was 82¢/gal. The Conway price of 75¢/gal was the lowest since it was also 75¢/gal the week of August 8.

As crude oil prices continue to trade under $90 per barrel (/bbl.), C₅₊ prices are suffering as prices fell 1% at both hubs. The Mont Belvieu price decreased to $2.21/gal, which was its second-highest price in a month. The Conway price of $2.11/gal was the lowest price at the hub in a month.

Conway butane and isobutane both improved 4% in price, but their counterparts at Mont Belvieu were more of a mixed bag as butane improved 2%, but isobutane was down very slightly.

Despite the decrease in price, C₅₊ remained the most profitable NGL to make at both hubs at $1.75/gal at Conway and $1.85/gal at Mont Belvieu. This was followed, in order, by isobutane at $1.38/gal at Conway and $1.51/gal at Mont Belvieu; butane at $1.33/gal at Conway and $1.36/gal at Mont Belvieu; propane at 46¢/gal at Conway and 53¢/gal at Mont Belvieu; and ethane at negative 2¢/gal at Conway and 3¢/gal at Mont Belvieu.

Contact the author, Frank Nieto, at fnieto@hartenergy.com