2012 has not been a good year for natural gas liquids prices. Spring was a particularly brutal season, with prices falling to levels not seen since the bad ole days of 2009. This summer prices have recovered from late-June lows, but the numbers are still in the dog house relative to the past couple of years. Although this is hardly something that sprung up overnight, lately it seems like there has been a rash of hand wringing by analysts, rating agencies and not a few companies warning about the consequences for midstream businesses and NGL producers. Our friends at Tudor Pickering called it a ‘Blood Bath’. Is it really that bad? Our blog series in March called 2012 the ‘Golden Age’ of gas processors. Have we gone from a Golden Age to a Blood Bath in six months? It seems like it’s time for another deep dive into gas processing and NGL production.
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2012 NGL Market Remedial
Six months ago, the ratio of crude oil to natural gas was headed to 50X. Gas was dirt cheap and crude oil was still above $100/bbl. We hit that 50X ratio on a cash basis in March and on a futures basis in April. As described here in The Golden Age, that was incredibly good news for gas processors. That’s because natural gas processing plants extract NGLs from natural gas - and NGL prices tend to follow crude oil prices. So gas processors were in effect converting very cheap molecules into much more expensive molecules. It was hugely profitable for both the producer and the processor. Consequently NGL production volumes shot up as more and more higher BTU content natural gas found its way into processing plants.
As NGL production soared, there was some concern about the possibility of an NGL oversupply situation similar to the natural gas surplus. And that was not the only bearish market development. By early spring the implications of the year-of-no-winter were starting to weigh on the propane market. Inventories at the end of the season were high and prices were falling fast. At about the same time the ethane market contracted as several petrochemical plants went on scheduled turnarounds. (Petrochemicals are the only market for ethane). Thus the light end of the NGL barrel (ethane and propane) hit the skids. See graph #1 below: the blue line is ethane price and the red line is propane price. For the most part, the relationship of the heavies (butanes and natural gasoline) to crude oil remained steady – for a while. Unfortunately May rolled around and that’s about the time crude oil prices started to weaken, sucking heavy NGL prices down with them. See Graph #2 below: the green line is normal butane, the purple line is natural gasoline and the black line is crude oil converted to $/gallon (divided by 42). Note that it is pretty easy to see how closely butane and natural gasoline track with the price of crude oil. That is simply because most butanes and natural gasoline find their way into motor gasoline or other markets that track crude prices.
So NGLs got hit with a quadruple whammy: higher production, low heating demand for propane, low petrochemical demand for ethane and declining crude prices. The first day of summer (June 20th) pretty much marked the low point. Since then a lot of propane has been exported, bringing that market more into balance. Ethane crackers have come back online and have been cranking up demand. Crude oil prices are again approaching $100/bbl. All these factors are bullish for NGL prices, and Graph #1 and #2 show how prices have moved up from the lows, particularly the heavies.