After averaging a meager $2.09/MMbtu for the first five months of this year, Henry Hub natural gas prices have recovered due in part to strong power generation demand driven by hot weather, with June to date averaging $2.85/MMbtu. Higher gas prices are likely to encourage more ethane ‘rejection’, meaning ethane production at gas processing plants sold as natural gas rather than recovered as liquid ethane destined for the petrochemical feedstock market. When ethane prices are lower than natural gas on a BTU basis, more ethane is rejected at the plant, assuming there are no physical or contractual constraints on doing so.
Historically the price of ethane at Mont Belvieu is higher than natural gas at Henry. The graphs below show the Mont Belvieu ethane price on a BTU basis, divided by the price of gas at the Henry Hub (front month futures). On an annual basis (left graph) the average ratio since 2008 has only been below 1.0 (meaning ethane cheaper than gas) for one year – 2014. Other years have seen downward spikes below zero, but they don’t tend to last long. That’s because the decline in production due to rejection tends to tighten the market, and the ratio recovers above 1.0.
