That crazy little ethane molecule is at it again. Yesterday the price blasted to 67.875 c/gal, a level last seen on January 17, 2012. Petchem cracker margins are low. Production is up, but inventories are down. A big driver of the bedlam is the price of natural gas, trading in the $7-$9/MMBtu range for the past month. But as usual with ethane, there’s a lot more happening below the surface — including high domestic demand, growing export volumes, and significant developments in downstream petrochemical markets — all shaking things up. Looking ahead, uncertainty looms, with more export capacity, ever-changing ethane rejection economics, and uneven production growth. In today’s RBN blog, we’ll leap back into the ethane market to see what’s been going on, and where ethane is headed over the next few years.
The ethane market is in turmoil. Ethane prices are up, almost double since January and the highest in 10 years. Higher natural gas prices — also up 2x since January — are a primary driver; petchems have to pay enough for their ethane feedstock to keep their supply from being rejected and sold as natural gas. But the margin for running ethane through a steam cracker to make ethylene is down hard, from 31 c/lb of ethylene produced last year to only 11 c/lb over the past month. That’s not only low from an absolute perspective, but it is also low relative to other feedstocks, with propane and butane enjoying higher margins for much of the past month. You might think that would mean reduced ethane demand from the petchems, but so far it is just the opposite. Steam cracker demand is at record highs.
Other strange things are happening too. According to EIA’s most recent stats, ethane production soared to an all-time high of 2.5 MMb/d in March, up 11% in just one month. Maybe that’s an outlier, but still, ethane production is up 22% over January 2020, just before the COVID meltdown. Even with production up, however, ethane inventories are low, at only 60% of the inventory max back in October 2020 and the lowest level for March since 2016, when there were far fewer ethane-only steam crackers online. More demand should signal a need for more inventories, but that’s not what we are seeing.
A close examination of the fundamentals reveals that these are not random, disconnected market developments. Instead, they are rational, predictable outcomes of fundamental changes happening across the ethane market. So, let’s get into the details.
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