The month of July represented the floor for both natural gas liquids (NGL) prices and frac spread margins this year, as well as the start of their recovery. The final two weeks of the month saw prices and margins rebound as Gulf Coast ethane crackers were brought back online from scheduled maintenance.
Several of these plans involved increasing cracking capacity, which will benefit the market in the long run. In addition, (NGL) producers benefitted from the first full month of Kinder Morgan’s Cochin pipeline transporting ethane-propane (E-P) mix from Conway to the Sarnia, Canada, petrochemical hub.
While there were positives in the month, the overall NGL market continued to be depressed. This was partially a result of several fractionators coming offline just as ethane cracking capacity returned to 100% levels. However, the biggest negative is that the NGL market is oversupplied, and it will take some time to work off this supply.
There is no magic switch that can turn natural gas prices around. In the past several years, we’ve seen both a harsh winter in the Northeast in 2010 as well as a smoldering hot summer throughout the U.S. this year. Both have had sizeable increases on gas prices as heating and cooling demand increased accordingly, but supply levels were such that prices have not even begun to approach 2007-2008 levels.
Even as producers turned their focus from dry gas plays to liquids-rich plays, supply continued to exceed demand, and a similar action appears to be taking hold in the NGL market.
There are positives, though, as demand and usage for both natural gas and NGLs continues to expand. Both the petrochemical and manufacturing industries are growing in the U.S. in response to the financial advantages being offered by low NGL prices. Similarly, utilities are switching more coal-fired power generators to utilize natural gas because of its cost and environmental advantages.
The increase in demand from manufacturers and utilities are not as fickle as those related to the weather that has challenged natural gas producers for the past few years. The same does not hold true for plastics and electric power generation. Both can fluctuate with the economy, but plastics and electricity will always have a consistent market in this country.
The one negative for both demand from utilities and manufacturers/petrochemical producers is that the infrastructure is continuing to be built up, so it will take more time for the storage overhang for both liquids and gas to be worked off.
As more infrastructure is added, the effect is extremely noticeable on prices. Margins improved throughout the month of July across the board at both hubs, but the largest increase in margin of any NGL in the month was for ethane, which improved 56% at Conway and 27% at Mont Belvieu, thanks to increased cracking capacity.
These improvements would have been even greater, but natural gas prices improved dramatically as cooling demand increased prices above $3.00 per million Btu at both Conway and Mont Belvieu
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