For the first time this year, the ratio of ethane to natural gas has crashed below 0.95X, signaling the prospects for ethane rejection in many parts of the country. The ratio – simply the Mont Belvieu ethane price on a BTU basis, divided by the price of gas at the Henry Hub - reflected a 15% decline in the price of ethane over the past week, primarily due to new rules from the Commerce Department requiring licenses to export ethane to China. These new rules have the potential to drastically affect the volume of ethane leaving the country as the U.S. currently sends more than 50% of its ethane exports to China. The ratio dropped to 0.92X on Friday (purple circle, right graph below)
When ethane prices are lower than natural gas on a BTU basis, more ethane is “rejected” at the natural gas processing plant and sold as natural gas, assuming there are no physical or contractual constraints on doing so. As shown in the left-hand graph, ethane prices have averaged above 1.0X for all but one of the past 18 years (red dot, 2014). Note that rejection in the ethane-rich Permian will likely continue to be minimal due to the low or negative prices for Permian gas.
