Dipping Low - Ethane Prices Bottom Out, Spurring a Huge Inventory Build

The ethane market isn’t for the faint at heart — it’s got lots of ups and downs, and it’s impacted by an unusually wide range of variables. A year ago this month, a combination of fractionation constraints in Mont Belvieu and rising demand from new ethane-only steam crackers sent ethane prices north of 60 cents/gallon. For most of the time since then, though, ethane prices were in something close to freefall, bottoming out at only 10 cents in late July before rebounding in recent weeks to 20 cents or so. During the big, months-long price decline, ethane traders and cracker operators did what anyone does when they can buy something they’ll need in the future for next to nothing — they stocked up. Today, we examine recent trends in ethane supply, demand, prices and storage levels, and take a look ahead.

Ethane is the Lady Gaga or Lil Nas X of hydrocarbons: there’s nothing else quite like it. As we said in our recent (and appropriately named) One of a Kind blog, ethane — the lightest of the so-called NGL “purity products” — is a chameleon: it can either be “rejected” into the natural gas stream at the gas processing plant 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). Another quirk is that, unlike propane, normal butane and natural gasoline, extracted or “produced” ethane has very limited use: it goes into crackers, a very small number of power generation plants or nothing.

The blue line in the left graph in Figure 1 shows that ethane consumption by U.S. steam crackers grew through most of 2017 and 2018. There was a major downward spike in August and September 2017 (dashed red oval) — that was caused by Hurricane Harvey, which (as locals will surely recall) dumped several feet of rain in the greater Houston area and temporarily shut down as much as 90% of Texas’s steam-cracker capacity, or more than half of total U.S. cracker capacity. A second, smaller dip came last September and October (dashed yellow circle), when a shortfall in fractionation capacity at the Mont Belvieu hub put a big squeeze on ethane supplies, sent ethane prices soaring, and put the margin for producing ethylene from ethane — and propane and butane — into negative territory (more on ethane prices and ethylene margins in a moment). Besides those two relatively brief periods, though, 2017 and 2018 were good times for ethane producers. According to Jacobs Consultancy’s Hodson Report, ethane consumption by U.S. steam crackers increased from 1.059 MMb/d in January 2017 to 1.536 MMb/d in December 2018 — a 45% gain — and, according to the Energy Information Administration (EIA), U.S. ethane exports (yellow-shaded area in right graph in Figure 2) rose from an average of 95 Mb/d in 2016 to 178 Mb/d in 2017 and 255 Mb/d in 2018 (stair-stepping red line).

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