How High - Ethane Prices May Rise With Steam-Cracker Demand, But Not Much

The U.S. ethane market has experienced major ups and downs in the past couple of years. First, there was sharply rising demand from new steam crackers, a fractionation-capacity crunch and soaring ethane prices. Then came an ethane demand slump, plummeting prices and a big jump in inventories. More recently, though, the market seems to have returned to a state of relative equilibrium. Ethane prices have settled in — at least for now — at about 22 cents/gallon (gal), a couple of pennies below where they had been standing rock-steady before all hell broke loose. Ethane demand from existing steam crackers is rising again, and new cracker capacity is coming online. The questions now are, with demand on the upswing, will ethane prices be rising too — and, if so, by how much? And what does that mean for steam cracker economics? Today, we discuss recent developments in the ethane market and explain why there’s good reason to believe that ethane prices won’t be spiking anytime soon.

In our One of a Kind blog in June, we explained that ethane is unique among the so-called NGL “purity products” in that it can either be “rejected” into the natural gas stream at gas processing plants and sold (at the price of gas) for its Btu value or extracted from mixed NGLs (through fractionation) like its purity-product brethren and sold to steam crackers (to produce ethylene and other petrochemical byproducts) or to a very limited number of power plants as fuel. Then, in Dipping Low in mid-September, we discussed the roller coaster the market was on for much of 2018 and the first eight and a half months of 2019. The background in these two blogs is critical to today’s topic: namely, what’s next for ethane demand, supply and prices.

We’ll begin with demand. As we said a couple of weeks ago, ethane consumption by U.S. steam crackers (blue line in Figure 1) grew through most of 2017 and 2018, interrupted by a big downward spike associated with Hurricane Harvey in August and September of 2017 (dashed red oval) and a smaller dip tied to a shortfall in fractionation capacity last fall (dashed yellow oval) that put a big squeeze on ethane supplies, sent ethane prices skyward, and put the margin for producing ethylene from ethane — and propane and butane — into negative territory. According to Jacobs Consultancy’s Hodson Report, steam-cracker ethane consumption increased 45% over that two-year period (to 1.536 MMb/d in December 2018). Part of the increase reflects the fact that in 2017-18 the margins for producing ethylene by using ethane as the cracker feedstock were generally higher than the margins realized by using either propane or butane. Ethane consumption also grew over the two-year period because a number of new ethane-only crackers with the capacity to consume a combined 300 Mb/d of ethane came online along the Gulf Coast.