Frac Spread: Price Rebound Will Be Better Latte Than Never

Sometime around this summer’s debut of the Caramel Waffle Cone Frappuccino, NGL prices themselves began to waffle within a 9% range. The July-August average for the hypothetical barrel fell 9.3% at the Mont Belvieu, Texas, hub and 13% at Conway, Kan., compared to the average in May-June.

Will Starbucks’ caffeine-laden offerings like Pumpkin Spice Latte and the beloved Salted Caramel Mocha give prices an autumn perk-me-up, or will we simply witness another fall?

In fact, there is no confirmed statistical correlation between consumption of coffee and market trends, although individuals employed both inside and outside of the energy industry have experienced massive growth linked to the S’mores Frappuccino (500 calories, 180 calories from fat, with 75 carbs in the grande version).

Only C₅₊ escaped the Frappuccino season relatively unscathed and it has suffered a beating in the past two weeks after a swift rise in mid-August. The rest of the NGL endured sharp setbacks during the two-month period.

Ethane led the retreat, its price dropping 23.9% at Mont Belvieu and 15.7% at Conway. The average price in August was 10.6% lower than in July at Mont Belvieu and 11.1% lower at Conway.

North American propane, with Asian markets seeking better deals from the Middle East, dropped 11.9% at Mont Belvieu and a whopping 19.9% at Conway. While propane rallied in the spring, it languished in the 30 cent per gallon (gal) range for much of the two-month period and, after the first week of September, was 22.8% below its high for the year set in May.

Butane was down 8.5% during July-August at Mont Belvieu and 13% at Conway. With winter driving season approaching, demand typically rises as refiners blend more butane into gasoline to ensure that engines start on cold days.

But Kelly Van Hull’s analysis this week in RBN Energy LLC’s report questioned whether that will happen. The spread between reformulated blendstock for oxygenate blending (RBOB) and butane was so thin at the end of August that the economics of adding butane to gasoline is the weakest since 2010.

Arbitrages have weakened between Mont Belvieu and markets in Europe, Africa and Asia, which has cut into exports since March, Van Hull wrote. How this plays out remains to be seen.

Isobutane lost 4.9% over July-August at Mont Belvieu. At Conway, it took a bigger hit—12.1%—and was down 15.9% from its high for 2016, set in late June.

Storage for both oil and natural gas tightened as the past week ended, with the American Petroleum Institute issuing a surprising report that crude inventories were down by 12.1 million barrels (MMbbl) , compared with expectations of a 225 Mbbl increase.

The U.S. Energy Information Administration (EIA) reported a 36 Bcf increase in natural gas storage to 3.437 Tcf, below the Bloomberg consensus of 43 Bcf. That level was 6% above the year-ago mark of 3.241 Tcf and 9.8% above the five-year average of 3.131 Tcf.

Tight storage could support commodity prices and benefit NGL, despite shakiness in exports. We’ll have more certainty on this by the start of Peppermint Mocha season.

Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman.