The Decline and Fall of Conway Ethane – Implications of a 75% collapse in price

On Friday, the Conway ethane (in E/P mix) price crashed to 13.5 cnts/gal.  No this is not the Decline and Fall of Western Civilization (neither the actual event or the punk rock movie of that name), but it is an important development for NGL and natural gas markets.  Six months ago the E/P mix price stood at 56 cnts/gal.  That’s a 75% drop.  Last week the price decline was particularly swift – 40% in five days.   

I have a personal connection to Conway ethane.  Since this is a blog, I can talk about such things.  Stay with me, this story has a point that is relevant today.

Many years ago I traded NGLs for Texaco (now Chevron).  My first job in the shop was in NGL Industrial Sales, which meant ethane trader.   I inherited the job from my good friend Jim Roop. He still is a good friend, and permits me to tell the story here.  Along with the job I also inherited a long spec trading position from Jim, 200,000 barrels of Conway E/P mix.  (For the uninitiated, that’s 80% ethane, 20% propane, with the price representing the entrained ethane component).  He told me what a great position it was at 22 cnts/gallon, and what an education it was going to be.

Jim was half right.  By the end of my 2nd day on the job the market was down to 20cnts, so I started working through Jim’s rolodex, just to see what kind of buying interest was out there.  It didn’t take long to figure out that there were no buyers.  Not at any price.  Nor were there any transactions.  The trade press was just picking up notional prices, but there were no deals.  None.  Nada.  The market was completely illiquid.

For the next couple of weeks the E/P mix market in Conway stayed inactive.  And each day the trade press reported down ticks in the price.  Not because of deals getting done.  But because there were NO deals getting done. So the price kept on falling down to 13 cnts/gal.  It stayed at that level for months, and I had the character-building experience of reporting on that position in each and every trading meeting.  That sort of thing sticks with you.

When the price of Conway ethane fell last week from 22 cnts/gal on Monday to 13 cents and change by Friday, it struck a nerve.  Déjà vu all over again.  Has this market gone illiquid, just like in my trading experience?  What got us into this mess?  How long will it last?  And what does it imply for the new ethane infrastructure investment that is planned over the next few years?  Let’s take a look at the numbers.

In the following paragraphs I’m going to assume you know the basics of NGL markets in the U.S.  If you don’t, send me an email and I’ll provide references to some background material.  This graph shows the OPIS Ethane (in EP Mix) Conway In-Well Any Average price for the past five years.  As you can see, this is not the first time Conway ethane prices have crashed since my trading days.  It happened in late 2008.  But of course, everything else crashed then too. 

That was when crude oil dropped to $40/bbl.  The entire NGL complex followed crude down.  Ethane was hit particularly hard by hurricane damage to Gulf Coast ethylene crackers followed by the economic-crash related shutdown of several ethylene plants.  It was a very bad time for ethane in general, and Conway E/P in particular. 

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