Over the last several weeks, the price of ethane at Mont Belvieu has risen sharply, increasing ethane’s premium over natural gas from 2 cents per gallon in February to over 6 cents today. This move gives producers increased incentives to recover ethane and make it available to the market.
Ethane made a similar price move in October, when ethane climbed to a 6 cpg premium over natural gas. Genscape data shows the price move led to a reduction in ethane rejection of over 130 mb/d over the two months that followed.
The rise in ethane versus natural gas price is consistent with long-term fundamentals. With rig counts continuing to fall, NGLs production is expected to make only modest gains through 2019 while ethane demand is expected to increase by 500-700 mb/d, depending on the start-dates of new ethylene crackers and export infrastructure. This means that the additional demand will largely need to be met by ethane that is currently being rejected. This will require a higher ethane price to encourage producers and midstream operators to pull it out of the natural gas stream, transport and fractionate it, paying potentially as much as 25-30 cpg to reach far away or infrastructure constrained barrels in the Bakken and Northeast.
Whether the longer-term market dynamics is what is driving the price action today is debatable. Given the level of attention the ethane balance has gotten in the wake of recent oil price declines, industry conferences, and quarterly earnings calls, it’s possible that significant buying has come from the back of the curve – consumers interested in securing their future supply and/or traders positioning later in 2016 or beyond.
Ethane exports have increased recently: one reporting service contributed the price rise to the new ethane capability on Mariner East I, postulating it is leading to lower deliveries to the Gulf Coast. However, Genscape data reflects that the increase in ethane exports is primarily being met by less rejection in the Northeast. Residue gas pipelines connected to the Sherwood and Houston processing plants have been showing steady decreases in ethane content in the gas stream over the last two weeks. Additionally, Genscape’s monitoring of the ATEX pipeline confirms that volumes have remained in the 100-110 mb/d level over recent weeks.
Looking more closely at today’s fundamentals, we see that the sharp move in ethane comes at a time when demand in Mont Belvieu is quite high: petrochemical plants have been operating at strong rates all quarter, with Genscape’s proprietary monitors showing capacity utilization averaging over 95 percent for the last four months. Genscape has seen this contributing to inventory draws in the first quarter, bringing stocks back to a days-of-supply value around 25, similar to that in September. In March, demand has likely moved even higher, with the run up in propane values shifting the cracker feedslate further toward ethane. Small delays in planned outages at ethylene crackers may also have brought additional buying.
Conditions such as this with high demand and relatively low stocks can make markets vulnerable to rapid price increases, particularly if unexpected supply disruptions occur, as participants bid higher to find supply. Genscape’s infrared cameras revealed that the 293 mb/d Trains 1-3 at Targa’s Cedar Bayou fractionator have been at reduced rate since March 7, and the TCEQ reported Lone Star’s new 100 mb/d Train III at their Mont Belvieu fractionator is shutting down for 14 days of maintenance, all leading to lower availability of purity ethane.
The price move will surely encourage more ethane availability in Mont Belvieu, but how much and when? In the Weekly Rejection Report published on March 14, 2016, Genscape reported that outside of the Northeast only 15 mb/d of ethane has come out of rejection over the last two weeks, so far much smaller than the 130 mb/d we saw in Q4. This is largely a function of time: many producers make recovery decisions on a monthly or quarterly basis, which would mean significant new supply would not hit the market until April. However, production declines in areas with cheaper transportation are contributing to less ethane availability at the same price-point: recoverable ethane in South Texas is now about 250 mb/d, down over 25 percent from 350 mb/d in mid 2015. At a 6 cpg premium, there is approximately another 50-75 mb/d of ethane that may be economically recovered. However, if ethane were to rise to approximately a 10 cent-per-gallon premium to natural gas, it would be economic to recover approximately 250 mb/d of additional ethane across PADDs 2 and 3.
Interestingly, increased ethane supply will come precisely at a time when demand is expected to fall. Ethylene crackers are poised for a major turnaround season beginning in April, with approximately 10 percent of cracking capacity expected offline in Q2. In Genscape’s Monthly Ethane Supply and Demand balance published in early March, ethane inventories were expected to build approximately 3 million barrels during Q2: with greater ethane recovery, the build could be significantly greater. However, inventory builds should be short-term. With the ethane curve in contango, pulling ethane out of rejection today to put into storage for use later may make sense: cavern capacity is looking plentiful as LPG inventories draw to lows and some believe the supply won’t be getting any cheaper once new ethane-cracking and export capacity comes online in the second half of this year.
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