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Crash and Burn - Why Did the Frac Spread Collapse? And What's Next?

Over the past nine months, the frac spread —a rough-cut measure of the value of extracting NGLs from raw gas at gas processing plants — has taken a terrifying plunge, from $9.82/MMBtu in early March to only $2.16/MMBtu on Monday. Given that the frac spread is the differential between the price of natural gas and the weighted average price of a typical barrel of NGLs on a dollars-per-MMBtu basis, a 78% nosedive like that suggests that something is seriously out of whack, and that at least some market players are taking a real hit financially. In today’s RBN blog, we discuss the frac spread, the drivers behind its recent freefall, and what it would take for gas processing margins to rebound.

There’s no perfect way to rate music. The Billboard charts — not to be confused with RBN’s NATGAS Billboard or Propane Billboard reports — measure the popularity of songs in particular categories (pop, R&B, hip hop, etc.) and Rolling Stone magazine’s list of the 500 Greatest Songs of All Time (first posted in 2004 and updated in 2021) tell you what 50 or so music critics think. But the best-selling music isn’t necessarily the best and a list compiled by a roomful of critics probably wouldn’t match your list or ours — though you’ve got to admit that Rolling Stones’ #1 songs in both the 2004 and 2021 lists (Bob Dylan’s “Like a Rolling Stone” and Aretha Franklin’s “Respect”) are hard to argue with.

There’s a similar challenge in measuring things in the energy industry. Sure, everyone can agree that a barrel is 42 gallons and a Bcf is, well, a billion cubic feet. But there’s at least some fuzziness, for lack of a better word, about what relationships between general prices — things like the crude-to-gas ratio, the crack spread, and the frac spread (the focus of today’s blog) — tell us. They sure do help, though, in setting baselines and getting the conversation started.

As we said in our introduction, the frac spread is simply a measure of the value of natural gas versus the value of a basket of NGLs. By convention at RBN, we use the front-month Henry Hub natural gas futures price versus a weighted average of Mont Belvieu NGL prices that’s converted from cents per gallon to dollars per MMBtu. We make that calculation each day and include it with our Spotcheck Indicators data, which is available to RBN Backstage Pass subscribers. This methodology is about as uncomplicated as you can get, and there are a lot of possible enhancements and refinements to the calculation that we addressed in our People Out There Turnin’ Natgas Into Gold blog series a while back.

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