After showing improvements in January, natural gas liquids (NGL) frac spread margins took a downturn in February despite NGL prices holding firm in the month. The reason for this decrease was simple: The uptick in heating demand caused natural gas prices to spike in the month.

Natural gas prices rose above $3.40 per million Btu (/MMBtu) at both Conway and Mont Belvieu in the month as temperatures were colder-than-normal along the East Coast and much of the Midwest for extended periods of the month.

The Conway price rose 5% to $3.43/MMBtu and the Mont Belvieu price increased 7% to $3.45/MMBtu. While this increased demand was a welcome respite for producers, it might be a tad late in heating season to make a real long-term impact as there has been a price decline in the forward curve.

“Shifting weather patterns have been the main driver of swinging natural gas prices….We believe that it is a little too late for cold weather for the rest of the winter to put a significant dent in storage unless natural gas production declines outside of temporary freeze-offs materialize earlier than expected,” Barclays Capital said in its Gas and Power Kaleidoscope for the week of February 5.

The largest drop in margin for the month was Conway ethane, which decreased 64% despite storage levels for the product being nearly 1 million barrels (bbl.) below their storage levels from the prior year. Additionally, Conway ethane experienced a price increase to 26¢ per gallon (/gal) from the average price in January of 23¢/gal, but it the margin was undone by the improvement in natural gas prices. The good news was that margins remained profitable, albeit at just a theoretical level. Mont Belvieu ethane was the lone NGL at either hub to experience an increase in margin during February as it rose 2%.

While ethane margins remained positive at both hubs, the forecast for ethane remains depressed for the immediate future as any price improvements are likely to cause supplies to increase to the point where the market is again overwhelmed. The only way that such a situation can be avoided is if the ethylene industry maximizes ethane cracking and operates at 95% of capacity, according to En*Vantage.

The outlook for propane is a bit brighter as a combination of heating demand and increased export capacity have combined to help work off the storage overhang at Mont Belvieu. In fact, as of March the Midcontinent overhang has subsided and the start-up of Enterprise Products Partners’ liquefied petroleum gas export expansion on the Houston Ship Channel is quickly moving to do the same at Mont Belvieu.

The bearish outlook for crude oil, which caused West Texas Intermediate prices to fall to about $92 per bbl. in February, is causing a pushback on heavy NGL prices and margins. In addition, prices suffered because refiners began to switch from making winter-grade gasoline to making summer-grade gasoline.

Price, Shrink of 42-gal NGL barrel based on following: Ethane, 36.5%; Propane, 31.8%; Normal Butane, 11.2%; Isobutane, 6.2%; Pentane+, 14.3%, Fuel, frac, transport costs not included. Conway gas based on NGPL Midcontinent zone, Mont Belvieu based on Houston Ship Channel. Shrink is defined as Btus that are removed from natural gas through the gathering and processing operation. Source: Frank Nieto

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

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