Frac Spread: At This Rate, Will Oil And Gas Be OK?

The five-day average price of Mont Belvieu, Texas, ethane tumbled 35% to a record low last week, barely staying in double-digits at just a touch above 10 cents per gallon (gal).

Has the price bottomed out? The trend is not encouraging. The final two days of the tracking period saw ethane decline to 9.4 cents/gal and then to 8.4 cents/gal. Construction delays have kept long-promised crackers from going online and storage on the Gulf Coast tight, so with demand low, rejection may well be on the rise.

Last week was rough. On July 30, the benchmark Henry Hub price dropped to $2.137, a 12-month low. Despite this low price, margins contracted across the board at Mont Belvieu, with propane’s narrowing by almost 10% and butane’s by more than 19%.

Hovering over the markets is wariness toward the weakening global economy. On July 31, the Federal Reserve cut interest rates for the first time since 2008 in an effort to inoculate the economy against a slowdown.

The action might do the trick but trade tensions with China deprive the markets of the necessary stability that encourages investors to invest. The shakiness was reflected in the sudden 7.9% drop in price of West Texas Intermediate crude following the announcement on Aug. 1 that the Trump administration intended to place an additional 10% tariff on $300 billion of Chinese goods.

“The ongoing uncertainty is making some companies more cautious about their capital spending,” said Fed Chairman Jerome Powell in announcing the cut. He gave no indication of whether more cuts were in the pipeline.

A recent piece by Ben Casselman in the New York Times listed warning signs for a recession. No. 1 is the unemployment rate.

The June unemployment for the country as a whole was 3.7%. Further, in the sector that the Bureau of Labor Statistics terms “mining, quarrying and oil and gas extraction,” the jobless rate was a very strong 3.2%, although slightly above the 2.9% rate of June 2018. In oil and gas extraction by itself, employment in June was at its highest point since October 2016. We are now entering a time of seasonal high employment in this sector—the rate from August through November never rose above 2% in the pre-winter months of 2018.

So far, so good.

In the week ended July 26, storage of natural gas in the Lower 48 experienced an increase of 65 billion cubic feet (Bcf), the Energy Information Administration (EIA) reported. Meanwhile, Stratas Advisors expected a 60 Bcf build and the Bloomberg consensus was 58 Bcf. The EIA figure resulted in a total of 2.634 trillion cubic feet (Tcf). That is 14.5% above the 2.3 Tcf figure at the same time in 2018 and 4.5% below the five-year average of 2.757 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.