Frac Spread: Price Movements Signal Economic Worries

Mont Belvieu, Texas, ethane recovered in the last week, reaching a five-week high in price and returning to positive territory in margin.

But the price is still 51% below what it was in the same week of 2018 and the most recent margin of fewer than 0.7 cents per gallon (gal) is far below the 13.96 cents/gal of 12 months ago. The hypothetical Mont Belvieu NGL barrel slipped below $20, where it has been for five of the last six weeks. The barrel’s margin, down about 1% compared to the previous week, has fallen 53.4% from the 24.73 cents/gal recorded a year ago.

Propane also rose for the fourth week in a row and its margin expanded by more than 7% in the past week. The Mont Belvieu price is off 47.2% where it was a year ago and its margin has narrowed by 58.7%. On July 23, propane’s ratio to West Texas Intermediate (WTI) crude oil was 34.6%.

Oil prices have reacted far more to fears about global demand and geopolitical tension than inventory reports showing large withdrawals. The U.S. Energy Information Administration reported a 10.8 million-barrel decrease in inventories for the week ending July 19, well above analysts’ consensus expectation of a 6.3 million-barrel draw. It came after a 3.1 million-barrel decrease during the previous week.

EnVantage Inc. called it a “troubling sign” when crude could not gain any upward traction given a litany of factors that should support a price rise, including ongoing and increasing tension with Iran, the ongoing collapse of Venezuela and extended production cuts by OPEC+.

“Unless geopolitical tensions escalate with Iran in which there is military action or a blockage of the Straits of Hormuz, the new normal for WTI prices is likely to be around $55 and $65 for the next couple of months with Brent at a $6 to $8 premium,” EnVantage said in a report.

Trade tensions are making investors nervous about a weakening global economy but old nemesis OPEC is doing its best to instill confidence, said a leading analyst at the recent State of Energy luncheon in Houston.

“OPEC again demonstrated that it is coherent and managing the oil price,” said Fred Charlton, managing director, chairman and head of energy investment banking for Simmons Energy. That is in stark contrast to the lack of discipline the cartel has often shown. But it will be difficult for OPEC and Russia to continue to be effective.

“Demand in the early part of this year was lower than expected,” Charlton said. He added that U.S. oil production continues to increase while Iran’s output continues to falter as a result of U.S.-led sanctions, which limits OPEC’s ability to manage price.

Charlton said it is possible that OPEC will be forced to make additional cuts in 2020 to maintain its leverage over global prices.

In the week ended July 19, storage of natural gas in the Lower 48 experienced an increase of 36 billion cubic feet (Bcf), the Energy Information Administration (EIA) reported. Meanwhile, Stratas Advisors expected a 40 Bcf build and the Bloomberg consensus was 37 Bcf. The EIA figure resulted in a total of 2.569 trillion cubic feet (Tcf). That is 13.2% above the 2.269 Tcf figure at the same time in 2018 and 5.6% below the five-year average of 2.72 Tcf.

Technical issues with Hart Energy’s data provider do not allow us to provide the price of ethane from Conway, Kan., for the last week of March because of a loss of pricing data for that time period. For the same reason, we cannot compare the price of the hypothetical Conway NGL barrel to the previous week. Conway ethane prices are not available for March 2019 and first-quarter 2019. We apologize for the inconvenience.