Purity ethane traded out of the Mont Belvieu natural gas liquids (NGL) hub in Texas recorded a full-day average spot price of 61.9375cts/gal on May 4, the highest since the 63.25ct/gal average price reported Jan. 23, 2012.
A more relevant comparison is with Sept. 18 and Sept. 19, 2018, when the OPIS-assessed daily average prices were 61.8125cts/gal and 60.0625cts/gal, respectively.
After languishing in the teens (cts/gal) to the 20ct/gal area for much of the
2019-2021 timeframe, punctuated by a couple of dips to historic lows below 10cts/gal, ethane's recovery to 60cts/gal seems like an impressive achievement.
It is not so. Trade experts agree that the current price rally is solely due to moves in U.S. natural gas. Ethane's price since last fall has remained closely correlated with Henry Hub futures, and the Mont Belvieu price is only following this week's surge to 14-year highs in the latter.
Ethane is a feedstock in the production of ethylene, which is a petrochemical and plastics building block. Gulf Coast ethane started becoming a more mainstream product after U.S. shale took off in the 2010s.
The start of seaborne ethane exports in the middle of the last decade gave the spot market critical mass. But the main consumption of ethane along the Gulf Coast is in the petrochemical sector. This market shaped the September 2018 price moves.
A fractionation crunch in Mont Belvieu had left purity NGL product at a premium, and fractionation fees had risen to stratospheric levels. At the same time, a fleet of new steam crackers designed specifically to use ethane as feedstock was poised to enter service along the Gulf Coast. Resulting supply worries sent ethane's spot price to 60cts/gal.
An OPIS news analysis published on Oct. 24, 2018 had noted: "Mainline NGL producers in the Permian Basin and the U.S. Midcontinent are increasing ethane rejection to mitigate the pipeline and fractionation capacity crunch in Texas.
This is creating an imbalance in the ethane market in the face of new U.S. Gulf Coast ethane cracker start-ups, leading to volatile spikes and slumps in the spot Mont Belvieu ethane price."
Henry Hub futures were in the $2.95-$3.00/MMBtu region during September 2018.
Ethane's frac spread (the cts/gal premium over natural gas, which gauges the financial feasibility of extracting ethane) had surged to 40-42cts/gal according to OPIS price assessments from that time.
External influences instead of internal dynamics are providing the impetus for the 2022 ethane price rally, and this is reflected in a continuing weak frac spread.
To set the stage: analysts estimate ethane's total consumption along the Gulf Coast at 2.2 million-2.3 million b/d, comprising 1.9 million-2 million b/d as cracker feed (at normal operating rates) and 250,000-300,000 b/d in exports from Houston and Nederland, Texas.
Exports have been at record volumes through 2022, aided by ethane's price attractiveness to overseas petrochemical buyers over propane and naphtha, competing feedstocks whose prices have been roiled by the Ukraine crisis.
However, finite dock capacity stateside and a finite number of ethane-capable ships in the global fleet would keep Gulf Coast exports capped around 300,000 b/d regardless of global demand.
Meanwhile, ethane consumption at Gulf Coast steam crackers is currently estimated to be some 200,000 b/d below seasonal levels due to plant maintenance and shutdowns. Some trade sources are concerned that a bottleneck in exports of polyethylene, which is produced from ethylene, would cause more misery.
Container shortages and other logistical issues have hampered these shipments.
An inability to clear these inventories could dampen ethylene production, which could eat into ethane demand.
The upshot of all these factors is that ethane supplies along the Gulf Coast since last fall have comfortably been fulfilling combined demand from crackers and exports. This equilibrium has left the ethane spot price with no driver of its own, and it has trended up or down in close correlation with Henry Hub.
Amid worries of a natural gas shortage stateside during the summer air-conditioning season, Henry Hub futures this week have posted stellar increases. They settled above $8.40/MMBtu on Wednesday, which provided ethane the cue to revisit 60cts/gal.
According to the OPIS North America LPG Report, ethane's frac spread over Henry Hub was a mere 6cts/gal on May 4 -- a testament to the absence of a 2018-style supply panic.
Some relief might arrive on the export front during the second half of 2022, when up to six new very large ethane carriers (VLECs), each capable of hauling
900,000 bbl of ethane in one go, are projected to join the world fleet. A delayed new cracker startup, the Baystar unit in Port Arthur, Texas, could also add some 62,000 b/d of new ethane demand on the cracking side.
"But [there is uncertainty] about the timing of these events. Consequently, ethane recovery economics are likely to remain marginal throughout the second quarter," management consultancy EnVantage Inc. said last week. The firm does not expect the ethane price to develop an identity independent of natural gas at least until that time.
--Reporting by Rajesh Joshi, rjoshi@opisnet.com
--Editing by Michael Kelly, mkelly@opisnet.com
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