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

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 hub price rose 5% to $3.43 per MMBtu and the Mont Belvieu hub price increased 7% to $3.45 per MMBtu. While this increased demand was a welcome respite for producers, it was a tad late in the heating season to make a real longterm impact as there was 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.

The largest margin drop for the month was Conway ethane, which decreased 64% despite storage levels being nearly 1 million barrels (bbl.) below their storage levels from the prior year. Additionally, Conway ethane experienced a price increase to 24¢ per gallon from the average price in January of 23¢ per gallon, but the margin was undone by the improvement in natural gas prices. The good news was that margins remained profitable, if only at 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 had subsided and the startup of Enterprise Products Partners’ liquefied petroleum gas export expansion on the Houston Ship Channel was 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.

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