Seasons Change - Winter Demand Offsets NGL Fractionation Capacity Constraints

Two months ago, NGL prices and market differentials were soaring, in large part due to fractionation capacity constraints on the Gulf Coast at Mont Belvieu. The constraints have not eased, yet the same prices and differentials have come crashing down from those lofty levels. Why has this happened, you ask, and how long will it last? There are a lot of factors contributing, but two of the most significant are seasonal NGL demand shifts and what’s going on with crude oil. Today, we examine the recent swings in NGL prices and market differentials and what may be around the next corner for these markets.

NGL prices and market differentials have experienced wild volatility in recent months, from multi-year highs in early October (2018) to back down near 2018 lows over the past week. One of the most important factors driving the highs was fractionation capacity constraints at Mont Belvieu in Texas — a topic we’ve discussed often here in the RBN blogosphere.

Recall that fractionation, the process of splitting a mixed natural gas liquids stream (raw-mix NGL; also known as y-grade) into “purity” products — ethane, propane, butanes and natural gasoline — is as important to the NGL market as refining is to the crude and products markets. In fact, the functions are quite similar — take a raw material with no direct use and transform it into usable products. Earlier this year, as fractionation capacity constraints started to become a big issue, we kicked off a Magical Mystery Tour blog series on Mont Belvieu and other Texas fractionators, and in We're Not in Kansas Anymore, we concluded that the primary culprits behind the blowout in NGL price differentials between the market hubs at Conway, Kansas, and Mont Belvieu were fractionation constraints combined with maxed out pipeline capacity to move purity products south from Conway to Mont Belvieu. We then dove deeper into the problem in Hotel Fractionation and put it all together in our Wild Ride Drill Down Report.

Here’s the bottom line: if you can’t fractionate the product, it can’t be used to meet demand. In September and early October, demand was moving higher, due to new petchem plants coming online and preparations for the winter propane season and butane blending season. Higher demand and constrained supply are always a recipe for higher prices. Not to mention that crude prices were moving north of $70/bbl during that period. But the main catalyst was the problem with fractionation.