The frac spread — a rough gauge of the value of extracting NGLs from raw gas — has fallen off a cliff, sinking from $4.93/MMBtu in late January to just $1.89/MMBtu on Friday (red dashed circle, right graph below). That’s the weakest showing in three years.
The frac spread is simply the differential between the price of natural gas and the weighted average price of a typical basket of NGLs on a dollars-per-MMBtu basis. The primary culprit in the current squeeze is the price of natural gas, up 50% over the same ten-month timeframe that the frac spread declined by 62%. The basket of NGLs declined 17% over the same period.
As shown in the left graph below, the average annual Frac Spread has ranged between a low of $2.38/MMbtu in 2020 to a high of $5.30/MMBtu in 2021. Since 2017, it has averaged just over $4.00/MMbtu. The drop below $2.00/MMbtu last week is highly unusual, and a red flag for gas processors and their customers. The Frac Spread will likely stay weak as long as natural gas prices remain above $4/MMbtu and crude prices (which influence most NGL prices) remain in the low-$60s/bbl or below.
