Natural gas and natural gas liquids (NGL) prices continued to struggle as 2012 drew to a close with ethane maintaining negative margins at both Mont Belvieu and Conway. Ethane prices are expected to continue to face headwinds for the first three to four months of 2013 as supply will outpace demand.

Improved Gulf Coast propane prices the week of December 12 helped give ethane prices minor improvements at both hubs as the products are highly correlated at this time. The Mont Belvieu price rose 1% to 22¢ per gallon (/gal) while the Conway price improved 2% to 17¢/gal.

Natural gas prices dipped 2% to $3.24 per million Btu (/MMBtu) at Conway and 3% to $3.27/MMBtu at Mont Belvieu. Even with these positives, ethane still faced widespread rejection as the Mont Belvieu margin was marginally negative and the Conway margin was minus 5¢/gal.

While ethane margins have been negative at Conway for much of the past six months, this was the second straight week that Mont Belvieu margins were negative. This is easily the weakest the U.S. ethane market has been since the dawn of the new millennium.

The looming fiscal cliff is the third major event to negatively impact the U.S. economy in this 12-year period with the other two being the terrorist attacks of September 11, 2001 and the recession/credit crisis in the second half of 2008.

In all three of these periods, Conway ethane margins turned negative and its Mont Belvieu counterpart turned negative twice. The NGL market hit its bottom the week of December 17, 2001 with Mont Belvieu ethane dropping to 18¢/gal, but the margin was still theoretically positive at 5¢/gal since natural gas prices were also weak at $1.98/MMBtu.

By comparison, the lowest the price fell in 2008 was when it hit 30¢/gal the week of December 3, which caused the margin to hit minus 3¢/gal. The previous two times that Mont Belvieu ethane turned negative, the status only lasted a few weeks before turning positive.

This time it could be different as U.S. natural gas production in 2001 was thought to be in a perpetual decline and 2008 was still the early days of the shale gas revolution. However, with natural gas production continuing to improve even as producers turn rigs towards oil and liquids-rich plays, these margins could move to a trampoline like effect where prices bounce between negative and positive several times until the storage overhang is finally worked off.

The one big positive for ethane is that it is really hard to imagine it facing more struggles than what it faced in 2012. Between a weak winter, another economic crisis/downturn, and both fractionators and crackers going offline, ethane faced challenges throughout the entire year.

Although the winter of 2012-2013 has been pretty mild thus far, it is unlikely that will be as warm as the winter of 2011-2012 and fractionation and cracking capacity should be strong, which will increase demand come spring. It will take some more time, but ethane’s annus horribilis is slowly but surely drawing to a close.

The other light NGL, propane, has also been negatively affected by the warm winter, but there is light at the end of its tunnel too as export capacity will increase once Enterprise Products Partners’ propane export terminal expansion is completed in January.

Mont Belvieu propane prices improved 2% to 76¢/gal, its second-lowest price since the week of May 30, when it was 75¢/gal. The Conway price fell again, as it was down slightly to 68¢/gal.

Heavy NGLs moved in two directions between Mont Belvieu and Conway as prices in the Gulf Coast were largely down and Midcontinent prices were up across the board. As the week of December 12 drew to a close, Mont Belvieu butane and isobutane prices both improved as they rebounded as BASF’s cracker was brought back online.

The most profitable NGL to make at both hubs was C5+ at $1.71/gal at Conway and $1.76/gal at Mont Belvieu. This was followed, in order, by isobutane at $1.50/gal at Conway and $1.52/gal at Mont Belvieu; butane at $1.48/gal at Conway and $1.40/gal at Mont Belvieu; propane at 39¢/gal at Conway and 46¢/gal at Mont Belvieu; and ethane at minus 5¢/gal at Conway and approximately nil at Mont Belvieu.

The theoretical NGL barrel price improved 1% to $39.33 per barrel (/bbl.) at Conway with a 2% improvement in margin to $27.50/bbl. The Mont Belvieu bbl. price was down slightly to $40.74/bbl. with a 1% gain in margin to $28.80/bbl.

Natural gas in storage fell 82 billion cubic feet to 3.724 trillion cubic feet (Tcf) from 3.806 Tcf the week of December 14, according to the Energy Information Administration. This was 2% above the 3.658 Tcf figure posted last year at the same time and 10% above the five-year average of 3.379 Tcf. The storage level should decrease the final week of 2012 as the National Weather Service is predicting colder than normal temperatures throughout the country.

Data Provided by Intercontinental Exchange. Individual product prices in
cents per gallon. NGL barrel in $/42 gallons | Source: Frank Nieto

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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