NGL prices continued to suffer in the final week of October as heating demand was limited by warmer-than-normal temperatures throughout much of the country and depressed crude prices.
West Texas Intermediate crude prices held at about $80 per barrel (/bbl) throughout the week. It remains to be seen whether this price represents the floor for the oil market or if there is more room for prices to drop until a brief recovery to close out this year.
The depressed nature of the market is likely to resume in the first half of the year, according to Barclays Capital. The investment firm anticipates the largest supply overhang for crude on the global market to take place in second-quarter 2015, which is normally the weakest period for crude demand. This has resulted in Barclays lowering its outlook for Brent crude from $87 to $88/bbl to $78 to $80/bbl in the first half of next year.
However, prices are expected to strongly recover in the second half of 2015. “Given that long-term marginal costs in oil production are well over $100/bbl and that the weak prices of the past four months have already resulted in several project cancellations/postponements, it seems extremely unlikely that oil prices will remain below $100 for very long, especially as we expect to see a combination of several factors contributing to an improvement in global oil balances by the second half of 2015,” the firm said in a recent research note.
These factors include the likelihood that OPEC will adjust to changing market dynamics, including decreased demand and increased production from non-OPEC nations, by lowering its own production. While the cartel has indicated that it will not be cutting back on production with prices below the $100/bbl threshold it previously set for cutbacks, the report noted that Saudi Arabian crude exports have decreased with more cuts likely as it shutters the 300,000 bbl/d oilfield in the neutral zone shared with Kuwait.
Another factor that will impact global balances is a decrease in tight oil production out of the U.S. due to lower prices that make unconventional drilling less economically sound. The lessened production out of the U.S. and OPEC nations should help improve demand growth, according to the report.
While natural gas prices improved during the week despite the limited heating demand, the NGL market is facing more headwinds than the gas market. These headwinds are not only in the form of lower crude prices, but also infrastructure outages—specifically ethane crackers being offline due to planned and unplanned maintenance.
Although these facilities are starting to come back online, a year of reduced capacity in the domestic petrochemical market has created a tremendous product overhang that will take months to work off even after the industry returns to full capacity.
Surprisingly, ethane prices have remained relatively firm despite the challenges they face. The Mont Belvieu price dropped 2% to 21 cents per gallon (/gal) and the Conway price fell 4% to 19 cents/gal, but both were in the range they’ve traded in since the start of the third quarter.
The other light NGL, propane, also experienced price depressions with the price falling 1% at Conway and 5% at Mont Belvieu, but the market should begin to experience an uptick with the start of the winter heating season. The U.S. Energy Information Administration (EIA) reported that propane inventories fell by more than 1 million bbl, although they are still above the five-year average.
Heavy NGL prices remained flat as they followed the same trajectory as crude prices. This left C5+ as the most profitable NGL to make at $1.21/gal at Conway and $1.29/gal at Mont Belvieu. This was followed, in order, by isobutane at 91 cents/gal at Conway and 74 cents/gal at Mont Belvieu; butane at 70 cents/gal at both hubs; propane at 57 cents/gal at Conway and 53 cents/gal at Mont Belvieu; and ethane at negative 6 cents/gal at Conway and negative 3 cents/gal at Mont Belvieu.
Natural gas storage levels increased by 87 billion cubic feet to 3.48 trillion cubic (Tcf) the week of Oct. 24 from 3.393 Tcf the previous week, according to the EIA. This was 8% below the 3.774 Tcf figure posted last year at the same time and the five-year average of 3.79 Tcf.
Storage levels should further increase, despite the calendar indicating that the heating season should be upon us, as the National Weather Service’s forecast for the first week of November indicates much warmer-than-normal temperatures throughout the country. This is likely to result in reduced heating demand while also not causing much of an increase in cooling demand due to the time of year.
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