crude-to-gas ratio

The whirlwind of events that has transpired in the past couple of months — namely the coronavirus pandemic and the collapse of the OPEC+ coalition — has not only shaken up the energy markets, but quite literally sent it reeling in the opposite direction than where it was headed just a few months ago. The oil price decline has reverberated through the energy complex, and key indicators that drive industry decisions are veering far off from their recent course, and in many cases, also from historical norms. The world is continuing to change at a rapid pace as the industry navigates the uncertainty. Just yesterday, in an emergency meeting, OPEC announced it had reached a 23-nation agreement to cut a combined 9.7 MMb/d of crude oil production starting May 1, 2020. Today, we highlight some of the biggest moves happening in prices and price relationships in recent days and weeks as the realities of crude oil demand constraints, supply glut and low prices set in.

Times are tough in the methanol market. Posted and spot prices for methanol have continued falling (to levels not seen since 2010). New methanol capacity, planned during the good ol’ days, has been coming online, further depressing prices. And while more methanol-to-olefins (MTO) plants are starting up in China—the product’s biggest market—they are running at far less than full speed. But one bright spot for U.S. methanol producers is dirt-cheap natural gas, providing U.S. plants a competitive advantage versus those in the rest of the world. Today, we examine recent developments in the methanol market and consider what may be coming next.

Projected growth in U.S. methanol production was based in large part on the expectation that domestic natural gas prices would remain significantly lower (on a per-MMBtu basis) than the price of crude oil, and that Asian demand for U.S.-sourced methanol would continue rising at a fast clip. Today both of those assumptions look dicey.  Natural gas prices remain low, but crude prices have languished below $50/Bbl for most of the past two months, and there are worries that China (by far the world’s largest methanol consumer) may be an economic bubble about to burst. Today, we consider recent developments that could slow the long-anticipated growth in natural gas use by U.S. methanol producers.

The values of the crude-to-gas ratio and the Frac spread have fallen fifty percent from their highs this year. Frac spreads represent the difference between the value of natural gas and natural gas liquids (NGLs), which are heavily influenced by the price of crude.  Thus the Frac spread is in effect tied to the gas-to crude ratio.  Current forward curves suggest that the crude-to-gas ratio will fall another 50 percent over the next few years. Today we ask whether the Frac spread will continue it’s fall next year and beyond.

This post continues yesterday’s review of the Golden Age of Natural Gas Processors, an analysis of the 50X crude-to-gas ratio on the economics of natural gas processing and the market for natural gas liquids.  To fully understand this post, first see The Golden Age of Natural Gas Processors – NGLs in a 50X Crude-to-Gas Ratio World.  Today we look at the impact of increasing NGL production on prices, and how NGL markets are responding to the price changes.

A long anticipated market milestone either has happened, is happening, or soon will happen. No I’m not talking about one-handle natural gas prices.  That’s old news.  The much more amazing number is a 50X crude-to-gas ratio. Whether it has happened yet or not depends on which prices you use to calculate the ratio.  More on that below.  But regardless of your math, one thing is certain.  The value of extracting a hydrocarbon molecule in gaseous form and selling that molecule as a liquid has never been higher.  It is a golden age of natural gas processing.  It is a business that over the past two years (since March 2010) has experienced a decline in feedstock costs of more than 50% and an increase in its traditional measure of profitability – the frac spread –by +33%, from $9/MMbtu to almost $12/MMbtu.