The values of the crude-to-gas ratio and the Frac spread have fallen fifty percent from their highs this year. Frac spreads represent the difference between the value of natural gas and natural gas liquids (NGLs), which are heavily influenced by the price of crude. Thus the Frac spread is in effect tied to the gas-to crude ratio. Current forward curves suggest that the crude-to-gas ratio will fall another 50 percent over the next few years. Today we ask whether the Frac spread will continue it’s fall next year and beyond.
Source: CME Futures Data from Morningstar [Click Chart to Enlarge]
In our Golden Age of Natural Gas Processors blog series we learned that a high crude-to-gas ratio underpins strong natural gas liquid (NGL) processing margins. If natural gas is less expensive and crude oil is more expensive then NGL processing margins tend to be higher. That is because NGL processors transform hydrocarbons in a gaseous form (natural gas) into hydrocarbons in a liquid form (NGLs) that tend to track the price of crude oil – at least some of the time.