The crude oil market garners all the headlines in the COVID/OPEC+ era, and understandably so. But the NGL market is also in turmoil and deserves attention too. Declining volumes of associated gas from crude-focused plays will soon be cutting into NGL supplies. Demand for natural gasoline has been hit hard, along with the crude, motor gasoline and jet fuel markets. But propane prices relative to crude oil have soared to historically high ratios, in part reflecting recent strong international demand for U.S. LPG exports. As for ethane — the lightest NGL, and the most important feedstock for the Gulf Coast petchem sector — it is going through wrenching changes, with major implications for both suppliers and steam crackers. Today, we begin a short series on the major dislocations that crude-market chaos is spurring in NGL production, ethane rejection, feedstock selection by steam crackers, and ethane/LPG exports.
The Short Term – U.S. Petchem Feedstock Advantage Obliterated
We’ll start with one of the most significant developments to hit NGL markets over the past few weeks: the obliteration of the feedstock cost advantage that U.S. petchems have enjoyed for more than a decade. That edge will not be back until crude oil recovers to a more traditional relationship relative to natural gas.
Canadian crude output is rising, requiring new export routes. As traditional pathways face constraints, the U.S. Rockies—especially the Guernsey, WY hub—are emerging as key corridors for moving Canadian heavy crude to downstream markets, including the Gulf Coast.
As shown in the left graph in Figure 1, the ratio of the price of ethane at Mont Belvieu to the price of Henry Hub natural gas has ratcheted up to 1.3X (see dashed red circle). This means that, on a Btu-equivalent basis, the value of ethane is now 130% of natural gas — higher than it has been in months. The middle graph shows that, over the same period, the price of natural gasoline tracked the decline-and-fall of WTI Cushing crude oil (shown in cents per gallon so it is comparable with natural gasoline), with the exception that it avoided the negative price shenanigans the crude market experienced on Monday, April 20. The outcome of relatively strong ethane prices and very weak natural gasoline prices is shown in the right graph. Ethane and natural gasoline have flip-flopped in their relative position as feedstocks for flexible steam crackers on the Gulf Coast, as measured in cents per pound margin of ethylene produced (see Good Margin Gone Bad). Translated, that means ethane is now an expensive feedstock, while natural gasoline is cheap, a complete reversal of the relationship since 2008.
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About the song
“One Thing Leads to Another” was written by Cy Curnin, Rupert Greenall, Jamie West-Oram and Adam Woods, and appears as the first track on The Fixx's second studio album, Reach the Beach. It was released as a single in August 1983, and went to #4 on the Billboard Hot 100 Singles chart. Personnel on the record were: Cy Curnin (vocals), Rupert Greenall (keyboards), Jamie West-Oram (guitar), Adam Woods (drums, percussion) and Alfie Agius (bass).
Reach the Beach was recorded in 1982-83 at Farmyard Studios in Buckinghamshire, England, with Rupert Hines producing. Released in May 1983, the album went to #8 on the Billboard Top 200 Albums chart. It has been certified Platinum by the Recording Industry Association of America.
The Fixx is an English new wave rock band formed in London in 1979. Singer Cy Curnin and drummer Adam Woods had previously played together in a band called Portraits, which released two albums for Ariola Records. The Fixx has released 10 studio albums, four live albums, 10 compilation albums and 21 singles. The band has regularly toured the world with its classic 1980s lineup, but touring is on hold this year due to COVID-19.
Comments
In a period of low oil prices ($40 or lower), a fall in oil production should also result in a drop in associated gas production. Assuming gas demand from power generation and LNG holds up (say into 2021+), I assume this will benefit producers of wet gas in the Northeast (Marcellus and Utica), which should also result in more ethane production from the Northeast? How is this factored into your post-COVID forecast for ethane discussed above?
In summary, I agree with your assertion that ethane rejection will reduce in the Permian and Eagle Ford, but shouldn't ethane production increase in the Northeast?