NGL Prices improving

[dan_s]

Tom Abrams – Morgan Stanley
April 25, 2017 4:02 AM GMT

NGLs saw relative strength in 1Q as exports and balances tightened for the heavier end of the barrel (C3+). Project announcements (both supply and demand) continue to progress as Lower 48 production resumes a growth path.

1Q17 Review: Volatility but barrel strength continues. We have seen NGL Field production decline over the last few months as EIA data has been published, with January production at 3,365 MBPD vs 3,598 MBPD in November, the most recent peak production level. The heavier end of the barrel (propane+) was buoyed from export levels and tightening balances. Composite prices tended to drift lower at the end of 1Q as crude prices corrected. Though ethane was flat over the last two quarters, frac spreads improved slightly in the 1Q with composite NGL prices up relative to gas likely attracting supply.

Ethane was weaker this quarter as gas prices fell. Ethane continues to trade at a growing premium to its gas equivalent though inventories continue to rise, potentially signaling continued buying ahead of new petrochemical facilities starting up through the end of this year. Additionally, as propane balances have tightened, we believe we may see more cracking feedslate switch to ethane, further benefiting ethane prices. Meanwhile, rejection levels remain elevated at ~580 MBPD.

Propane exports continue to have positive momentum. Export levels have continued the momentum that they picked up through 4Q and, with flat production, storage levels have significantly tightened relative to last year. This is encouraging given the mild winter. Moving forward, we see propane losing share in cracking economics as ethane and butanes become more attractive but also new PDH demand coming online (EPD, 35MBPD of propane; mid-17).

Normal and Iso Butane / Pentanes Plus strengthened during the quarter. We believe favorable cracking economics boosted demand as pricing as a % of WTI improved. Also export levels were relatively healthy.

Natural gasoline also saw improvement relative to WTI from rising blending demand as gasoline production rises ahead of the summer driving season.

NGLfrac spreads tick higher in 1Q, butethanefrac largelystays flat. With strengthening of propane plus, we saw frac spreads move higher in tandem with the crude to gas ratio (a general indicator of the profitability of fractionation NGLstreams). Meanwhile ethane frac spreads remained relatively flat compared to 4Q16 as ethane prices, with some volatility, weakened on average along with gas prices. We will be continuing to monitor these indicators as they provide directional indicators for NGL supply (more profitable margins leads to greater supply), but we caveat that regional economics (frac + transportation costs)need to be assessed to further determine the supply response. We will be particularly mindful of Rockies and Northeast NGL
production given they are more transportation disadvantaged, but midstream operators also tend to run integrated systems (more favorable economics).
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Conclusion: NGL market is in MUCH BETTER shape than it was a year ago.