Frac Spread: Bargain Shopping

The first full week of September once again saw an improvement in NGL prices as traders increased demand on the heavy end of the barrel (bbl) to fill in supply gaps. Unlike the spring and summer seasons, some of these gains may stick due to refiners switching from summer-grade to winter-grade gasoline production.

Though a sizable portion of refineries are undergoing planned turnarounds in anticipation of the winter season, lower prices of butane and isobutane are encouraging refiners to acquire supplies earlier. This is similar to the situation taking place in the propane market as farmers and suppliers stock up ahead of the crop-drying and winter-heating seasons.

This helps explain why those three products had the largest price increases in the theoretical NGL bbl for the week of Sept. 2. The improved propane prices, which rose 14% at Conway and 11% at Mont Belvieu, were especially impressive considering that storage is still at record levels.

Prices are likely to dip until the heating season arrives, but the improvements experienced this week should help to shorten the shoulder season. As it currently stands, propane prices at both hubs were at their highest level since mid-May.

Another reason for improved propane prices is the product’s increasingly closer relationship to crude prices as the bulk of NGL production has been through associated production in the last few years. West Texas Intermediate (WTI) prices have been trading in the mid-$40/bbl range for the past few weeks after falling below $40/bbl. WTI prices may struggle to approach $60+/bbl through the end of the year but low prices have caused an increase in gasoline demand, which should help create a bottom for crude prices barring a geopolitical event.

Ethane prices remain a mixed bag as the Conway price rose 8% to 16 cents per gallon (/gal), its highest price in a month; however, the Mont Belvieu price remained flat for the third straight week at 18 cents/gal. In fact, the Mont Belvieu price has traded in this range for the past two months.

Complicating matters for the ethane price outlook is that natural gas prices have also been stagnant. Ethane’s close relationship with gas has also helped keep Mont Belvieu prices steady. Unfortunately, the $2.60 per million Btu level gas has been trading at both hubs is resulting in negative margins for ethane.

The one positive to take from ethane prices is that they are the closest to a recovery back to their 2014 levels. Of course, last year ethane margins were negative so there is still a lot of work to do for ethane to return to a balanced market.

It is likely that ethane won’t become fully balanced for several more years, but storage levels have decreased this summer and should see rejection levels dial back in the fall. This will help prices return to their highest levels in years. As it stands, margins are on the cusp of positivity at both hubs, but are still not attractive.

Similarly the theoretical NGL bbl may be positive, but prices are also not as striking as the market would like. The Mont Belvieu bbl rose 7% to $18.95/bbl with a 16% gain in margin to $9.27/bbl. The Conway price improved 9% to $18.37/bbl with a 22% gain in margin to $8.79/bbl.

The most profitable NGL to make at both hubs was C5+ at 70 cents/gal at Conway and 68 cents/gal at Mont Belvieu. This was followed, in order, by isobutane at 33 cents/gal at Conway and 30 cents/gal at Mont Belvieu; butane at 23 cents/gal at Conway and 28 cents/gal at Mont Belvieu; propane at 17 cents/gal at Conway and 19 cents/gal at Mont Belvieu; and ethane at negative 2 cents/gal at Conway and nil at Mont Belvieu.

The U.S. Energy Information Administration reported a gas storage injection of 68 billion cubic feet (Bcf) for the week of Sept. 4. This was about 20 Bcf lower than analysts had been predicting as cooling demand was up along the East Coast. Overall the storage level rose to 3.261 trillion cubic feet (Tcf) from 3.193 Tcf, which was 17% higher than the 2.788 Tcf reported last year at the same time and 4% greater than the five-year average of 3.134 Tcf.

The National Weather Service’s forecast for the week of Sept. 16 anticipates warmer-than-normal temperatures to continue throughout the East Coast through the Gulf Coast and into the Midwest. This should further reduce storage injection levels and help mitigate any fears of the industry hitting storage capacity before heating season.