In Another Leg Lower for NGL Prices, we analyzed the recent downturn in the spot prices of purity ethane and purity propane at the delivery point in Mont Belvieu, Texas, and linked this pullback to the recent weakness in shares of master limited partnerships (MLP) that own upstream assets or gathering and processing systems.
A surge in US ethane stockpiles suggests that the price of this natural gas liquid (NGL) will remain depressed heading into 2013, especially with inventories up 56 percent from year-ago levels in October.
Source: Bloomberg, American Petroleum Institute
Fortunately for midstream and upstream operators with exposure to fluctuations in ethane prices, we don’t expect the price of this NGL to drop much lower. The ethane market has only two release valves: the domestic petrochemical industry and ethane rejection at gas-processing plants, a phenomenon that occurs when the margins from separating the NGL from the gas stream turn negative.
Accordingly, the spot price of natural gas sets a floor for ethane prices. With the spot price of ethane in Mont Belvieu hovering near the equivalent price of natural gas, the incentives for rejecting ethane have grown more compelling–a development that eventually will help to rebalance the market.
But the biggest relief will come from the coming wave of capacity expansions in the petrochemical industry in the back half of the year and the completion of world-scale ethane crackers after 2015.
Source: Bloomberg, ICIS Chemical Business, Company Reports
Elliott and Roger on Feb. 26, 2014
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