Let's Get Crackin'

On Wednesday of last week, Conway ethane dropped to 4 cnts/gal, another multi-decade low for any natural gas liquid and an 86% decline in the ethane price since the first of the year.  But Conway ethane is not the only NGL that has been suffering. As shown in the graph below, ethane propane and natural gasoline are all off hard as high propane inventories combined with a $20/bbl decline in the price of crude oil rippled through NGL markets.  What do changes in the prices of these NGLs mean for the relative value of each NGL as a petrochemical feedstock?  Could we see natural gasoline start competing against ethane and propane?  To answer these questions and to understand how natural gasoline petrochemical feedstock economics compare to ethane and propane numbers, we’ll dive one last time into our petchem spreadsheets.

In just over a month, purity ethane prices in Mont Belvieu are off 41%, falling from 50 cnts/gal on 4/30 to 29 cnts/gal on Friday, 6/8.  During the same period, non-TET propane was down 35% from 116 cnts/gal to 75 cnts/gal (see left graph, below).  Last week when we looked at petrochemical feedstock economics, propane was the preferred feedstock for the first time in years.  But a couple of days later that relationship flipped back to ethane.   At first glance, that seems strange.  Both ethane and propane increased during the first half of the week, then came back off (see right graph).  But feedstock economics went from favoring propane by more than a nickel per pound of ethylene to favoring ethane by just over a penny on Friday.  To understand how and why this shift happened we’ll need to break out the spreadsheets again.

Last week the price of ethylene dropped from the low 50s per pound down to the low 40s. In a big flip-flop, propane has been the preferred feedstock for petrochemical plants on the Gulf Coast for a couple of weeks now (it had been ethane for the most part of the last 3+ years).  And the petchem market hit ethane where it hurts, whacking the price down to 29.875 cnts/gal on Friday according to OPIS.  A month ago that price was 50 cnts/gal. In October of last year the price was almost $1.00 (see graph below).  This is good news for petchems, right?  Well, it all depends on the margin that the petchem realizes on the feedstocks that are run.  So to figure that out, let’s get to Part III of our series on the economics of petrochemical feedstocks.

Yesterday we started our series on the economics of petrochemical feedstocks.  With NGLs driving the natural gas market, it is critically important to understand the factors that influence NGL prices.  The #1 factor is the petrochemical market that consumes more than half of all NGL production and 100% of the ethane.  In Let’s Get Cracking we did a brief overview of olefin crackers including how they work, what they make and where they are located.  We also introduced the fundamental fact of feedstock acquisition of the ethylene cracker industry:  the best feedstock is the one that will produce the highest margin possible, after deducting byproduct credits.  On the surface this seems simple – just make your product out of the cheapest stuff possible.  But below the surface it can get quite complex.  Of course, deep dives into energy analytics are what we live for here at RBN, so let’s get into the details. 

Natural gas production seems totally dependent on NGLs.  In turn, NGLs are highly dependent on petrochemical crackers.  How does this work?  What could go wrong?  That’s the topic of this multi-part series on NGLs in the petrochemical industry.  Part I is an overview of the market dynamics involved and will set us up for going deep into the math of petrochemical feedstocks.  So let’s get cracking.