Frac Spread: NGL Fundamental Struggles Resume In Attack Aftermath

The aftermath of the attack on Saudi oil installations could have an interesting effect on U.S. polyethylene exports.

China is a major buyer of Saudi petrochemicals but many of the Kingdom’s customers have been advised to expect supply delays to existing orders, Argus reported. That creates a potential opportunity for U.S. producers to step into the southeast Asian market void.

Just one little bothersome detail: “China has tariffs on U.S. polyethylene, so they have the greatest exposure to a shortfall of petrochemicals from Saudi Arabia,” said EnVantage Inc. in a recent report. “Whether this shortfall spurs China to lift the tariff on U.S. polyethylene remains to be seen.”

The Saudi outage will impact U.S. ethane only indirectly because Saudi Arabia does not export ethane. EnVantage said. Saudi petrochemical companies, however, experienced feedstock supply disruptions of as much as 50%.

Ethane at Mont Belvieu, Texas, dipped below 20 cents per gallon (gal) last week, where it has resided since early May. In 2018 at this time, Mont Belvieu ethane was priced at almost 47 cents/gal. Ethane’s margin at Mont Belvieu was chopped in half over the week even though the benchmark Henry Hub price of natural gas dipped.

The market reaction is tied to operational problems at several ethylene plants, EnVantage said. Even Sasol’s new Lake Charles (La.) Chemical Project, while operating, is only running at 50%.

Still, when the next wave of plants comes online, ethane demand will jump, the analysts said. An expected price hike, however, will be counterbalanced by an imminent increase in supply.

“The operational stability of the ethylene industry and delays in getting new crackers online are risks that can’t be discounted when trying to predict ethane balances and their impact on ethane’s price direction,” EnVantage said.

But the analysts still provided a price outlook. Best case scenario for the end of the year (assuming cracking demand increases by another 300,000 barrels per day) is a range of 25 cents/gal to 30 cents/gal. More likely, however, is a range between 20 cents/gal and 25 cents/gal.

Propane’s boost following the attack on Saudi installations was short-lived. The announcement that the Saudis had restored much of the oil production lost during the attacks ended propane’s surge and returned it to reality. And the reality is that there is too much of it in storage.

Even though the U.S. Energy Information Administration (EIA) reported that inventories declined slightly in the week ending Sept. 20, the total was still 31% above where it was in 2018 at this time. Propane’s price held steady at both the Mont Belvieu and Conway, Kan., hubs and its margin increased by 3.5% at Mont Belvieu.

In the week ended Sept. 20, storage of natural gas in the Lower 48 experienced an increase of 102 billion cubic feet (Bcf), the Energy Information Administration (EIA) reported. That compared to the Stratas Advisors expectation of a 99 Bcf build and the Bloomberg consensus of a 90 Bcf build. The EIA figure resulted in a total of 3.205 trillion cubic feet (Tcf). That is 16.1% above the 2.761 Tcf figure at the same time in 2018 and 1.4% below the five-year average of 3.252 Tcf.