God Only Knows - Why Did the Normal Butane Market Go On a Holiday Bender?

The normal butane market was anything but normal the past few weeks. All’s back to square one now, but in the last week of 2016 the price for normal butane spiked to more than $1.20/gal from only $0.73/gal in November. The differential between isobutane and normal butane plummeted into record-shattering negative territory. And the margin from cracking normal butane to make ethylene and other products fell off the chart—literally, our PowerPoints had to be reworked to show how much the margin had fallen. What the heck went on there? Today, we discuss the recent upheaval, what may have caused it, and why things snapped back to normal so quickly.

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As its name suggests, normal butane (C4), with its four carbon atoms per molecule, is a no-drama, middle-of-the-pack natural gas liquid (NGL) that’s heavier than ethane (C2) and propane (C3), lighter than natural gasoline (C5+), and is a close cousin to isobutane (IC4), an isomer of normal butane that (as we’ll get to in a moment) is a bit more exotic. As we said a while back in My Time Has Come, most normal butane is supplied by natural gas processing plants and fractionators, which separate NGLs from the raw gas stream (processing plants) and split the mixed NGLs into “purity products” (ethane, propane, normal butane, isobutane and natural gasoline); the balance of normal butane supplies come from refineries. Most normal butane is used as a motor gasoline blendstock (see Wasting Away in Butane Blendingville), primarily during the colder months of the year, when federal environmental regulations allow gasoline to have a higher Reid vapor pressure, or RVP. RVP is a measure of volatility, that is, the tendency of a substance to vaporize (see Regulatory Vapor Pressure Party); normal butane has a very high RVP of 52 pounds per square inch, or psi, and blending it into gasoline encourages vaporization—good for starting car engines when it’s cold outside but not so good for engine operation and the environment when it’s hot. About 30% of normal butane produced by gas processing plants is used as a feedstock in ethylene plants (steam crackers), and smaller volumes of normal butane are used as feedstock for butamer (isomerization) units to produce isobutane. Isobutane’s primary used is as a feed for refinery alkylation units, which produce a high-octane gasoline blending component called alkylate (see You Can Just Iso My Butane). Isobutane also is used as a propellant in shaving cream, cooking sprays and the like; as the liquid fuel in “Bic”-type lighters; a replacement for Freon in refrigeration equipment; and—more exotically—for calorimetric measurements, calibration of gas mixtures and emissions monitoring.

As you can see in Figure 1, isobutane and normal butane prices have had a generally consistent relationship over the past few years, with their differential mostly holding steady between zero and $0.05 or $0.10/gal—rarely does the price of isobutane undercut that of normal butane, and even when it does it’s mostly by only a fraction of a penny. Well, until this past holiday season, that is, when isobutane all of a sudden was selling for as much as $0.22/gal less than normal butane—an absolutely stunning thing.

Figure 1; Source: OPIS

The blame for this differential nosedive falls squarely on normal butane, whose price jumped ~$0.10/gal in the first three trading days of December (to ~$0.90/gal), then rose to ~$1.00/gal by December 19, and to more than $1.20/gal on the three trading days right after Christmas, peaking at ~$1.27/gal on December 28 (see Figure 2). After that, normal butane’s price plummeted, falling 24% to ~$0.96/gal by January 3 (the first day of trading in 2017); at yesterday’s close (January 4), the price stood at $0.982/gal, much closer to where it was before the price run-up started a month ago. The price of isobutane bounced around some in December too (trading as low as ~$0.88/gal and as high as ~$1.10/gal), but that $0.22/gal range was less than half of normal butane’s $0.47/gal range.

Figure 2; Source: OPIS

Before we go into what we think may have been behind this, we need to point out the profound effect that this super-spike in normal butane prices had on steam cracker margins for the NGL. In Part 1 of You’re the One That I Want, our ongoing blog series on how ethylene plants determine which feedstock (ethane, propane, normal butane, natural gasoline/naphtha) generates the best financial result, normal butane in 2016 accounted for about 8% of steam cracker feedstock volumes. But, given what recently happened to normal butane prices, our guess is that purchases of normal butane by ethylene plants have been few and far between the past few weeks. Figure 3 tells the tale.

Figure 3; Source: RBN

As we said in that recent blog, the process for determining the cracking margin (which is measured in cents per pound of ethylene) considers many inputs (feedstock price, ethylene price, the various byproducts that each feedstock yields, and the prices of these byproducts). As you can see in Figure 3, the cracking margin for normal butane (green line) had been very similar to the margin for its “competitors” —until December, when normal butane’s cracking margin cratered, not only falling below zero but to a negative $0.10/lb. In layman’s terms, that means cracking newly bought normal butane in December was a decidedly losing proposition. (Note that the cracking margins for the other feedstocks changed very little last month.)

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So, what was behind the sharp rise in normal butane prices in December—especially that spike right before and right after Christmas? It seems that at least four factors may have been at play. First, a cyclical factor is involved; that is, normal butane prices—and the ratio between normal butane and motor gasoline prices (see Figure 3) —tend to bottom out during the hottest months (when refineries ramp up production of lower-RVP, butane-light gasoline for summer needs); start climbing by September, when refineries transition to their winter blending season (with its much higher use of butane); and peak in December/January when refiners and blenders compete in the market for whatever wintertime normal butane needs they hadn’t locked in the previous summer and early fall. During these annual holiday season peaks, buyers typically bid up the price of normal butane to 60% or 70% of the price of motor gasoline. In late 2016 the spike in the normal butane price was even bigger—to almost 80% that of gasoline, the highest butane to gasoline ratio since the winter of 2011-12.

Figure 4; Source: OPIS

A second factor may be exports. According to the January 4 (2017) edition of RBN’s NGL Voyager report, waterborne exports of liquefied petroleum gas (LPG, propane and butane) averaged 836 Mb/d in 2016, up 25% (or 167 Mb/d) from 2015, and continued rising through December (2016), when they averaged 974 Mb/d. Gulf Coast export terminals account for the bulk of LPG exports (for instance, 929 Mb/d of the 974 Mb/d total in December). Propane accounted for the vast majority of total Gulf Coast LPG exports in December, and butane—whose arbs (or financial incentives for exporting) were hit hard by butane’s December price rise—accounted for only a small volume. However, it looks like that was enough to make a difference in the market. In addition to waterborne butane exports, the U.S. also pipes butane to Mexico and rails it to Canada.

A third factor contributing to the spike was the holiday season itself. Most market participants were home singing Christmas carols or whatever it is that NGL traders do during the holidays. (We won’t speculate here about what that might be.) Normal butane is not the most liquid of markets in the first place, so take 80% of butane traders out of the market and it creates the potential for a few trades to have an outsized effect on the price as reported by trade publications.

And that leads us to a fourth factor that may have played a big role: an end of year problem for a company short normal butane. We understand that that a company needed prompt normal butane barrels for a cargo at just the wrong time and had to pay up, contributing to the higher price.

Put all of these factors together and you have a recipe for a price spike, which is exactly what happened. It’s hard to know which of these factors played the biggest role. To quote Brian Wilson, “God only knows.” That’s the way it goes sometimes with NGL markets. The good news is that the market stepped in to handle the situation just as soon as trading in the new year opened for business, and normal butane is now back to the level where it belongs this time of year. The holiday butane bender of late 2016 appears to be over. Until next time.

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“God Only Knows” was the eighth track on The Beach Boys’ iconic 1966 album Pet Sounds, and is one of the group’s best-known, best-loved songs. In the U.S., the song (written by Brian Wilson and Tony Asher) was released as the B-side of a single that featured “Wouldn’t It Be Nice”, and ranks #25 on Rolling Stone magazine’s list of “The 500 Greatest Songs of All Time.”

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Comments

New Regulation

Thanks for the nice article.

In the meantime, one journal reports that the normal butane spike in end of 2016 had someting with a New EPA(about sulfur content) regulation. Any comment on this?