What winter giveth, spring taketh away was the message this year as the price support provided by a late-breaking winter saw utilities turn their attention from gas to coal in the spring. The year 2013 got off to a solid start for the natural gas liquids (NGL) market after a rough 2012, but it seems that the macro environment is once again working against NGLs.

Typically the shoulder season eases up a bit on NGL and natural gas prices by the time May rolls around with increased cooling demand helping to push gas prices up. While there was increased cooling demand this year when the calendar turned to May, there was a surprise in the form of utilities switching from gas-fired power generation back to coal due to the stronger economics provided by that energy source.

While natural gas prices rose 4% at both Mont Belvieu and Conway from the start of May to the end of the month, utilities indicated that $4.00 per million Btu was too rich for their taste. The NGL market faced another pushback in the spring from a series of headwinds.

The first was a series of both planned and unplanned ethane cracker outages in the Gulf Coast, which went on longer than anticipated. At press time, the market is still suffering from significant capacity outages. Consequently ethane demand cratered and stock levels began to build, causing frac spread margins to decrease at both hubs in May. Conway margins remained negative in the month and Mont Belvieu margins fell by 90% and were only theoretically positive.

It should be noted that negative prices did not result in full ethane rejection as that is impossible due to contracts, facility requirements and the fact that some regions offered profitability to produce ethane at various points.

Propane prices fell at both hubs in the month despite increased liquefied petroleum gas (LPG) export demand as the product faced impacts from ethane cracker outages as E-P mix prices decreased at both hubs. The price differential between Conway and Mont Belvieu propane prices began to close in May and this trend is expected to continue going forward as new Y-grade pipelines are connected to the hubs in the third-quarter.

Although European demand for LPG has been decreasing, there is still strong worldwide demand, especially in Latin America for LPG to support propane prices. This could change if the gap with European prices narrows drastically.

A Morgan Stanley North America Insight research report on NGL dynamics released on May 6 stated that there are two possible scenarios for U.S. propane prices going forward. The below-consensus outcome is that increased LPG exports could overwhelm the international market and cause propane and ethane to trade at parity. The above-consensus outcome is that international LPG remains very strong and pushes U.S. propane prices to international levels, minus transportation costs.

Heavy NGL prices have struggled due to stagnant crude oil prices, lessened gasoline demand and the refiners switching from winter-grade gasoline to summer-grade gasoline. In addition, their inventory levels are growing as more NGLs are produced and recovery techniques improve.

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

Comments