How are NGLs affected by a troubled oil market, but a gas market that may be much more positive if associated gas production falls? The answer for NGLs, as always, is that it sits somewhere in the middle. The discussion below outlines what AEGIS sees as the major bullish and bearish risks for NGLs, not only for the short-term, but also as we approach 2021.
There are several risks that affect NGLs universally, but several affect one or two NGLs specifically. Overall, NGLs face demand-side risks in the near-term. Most risks stem from the Covid-19 root—less fuels and feedstocks are being consumed in the world.
On the bullish side, the most acute risk is ongoing declines in associated-gas and rich-gas production. Shut-ins are being announced in oil plays, and AEGIS believes economics in rich-gas plays are now more challenged as NGLs prices are lower.
Below, we note some individual risks among the NGLs purity products. The underlined items denote risks that affect an individual product more than they affect others.
Ethane faces an immediate risk of low utilization at ethylene plants, otherwise known as steam crackers. Crackers consume NGLs as feedstock to make olefins (i.e. ethylene, propylene), and most new crackers predominantly consume ethane. Springtime is a normal time for planned maintenance, and economics have limited some crackers from running at full rates.
Also related to crackers, ethane is not the most profitable feedstock, as propane, butane, and naphtha prices have fallen.
But the outlook for ethane is good. Natural gas is a “floor” for ethane prices, and we expect natty to do well as supply declines. Further, ethane’s demand is likely to rise as Covid-19’s demand destruction passes.
Propane and butane are often analyzed as one unit, under the Liquefied Petroleum Gas (LPG) moniker. We’ll discuss propane by itself first.
Propane faces some intense short-term bearish risks. First, propane inventories are very high, especially along the Gulf Coast. This is important because Mont Belvieu is the delivery location, and it is awash in extra propane molecules.
The storage situation is especially concerning because we’re now entering the seasonal decline in propane demand. From now through August, propane demand will fall.
But later this year, things may turn around. New export capacity was added in 3Q2019, and more is coming in 3Q2020. In fact, it’s so much that it will exceed the amount of propane and butane production growth, by our estimates. That means that if Asian demand for LPG picks up, the U.S. will be able to supply product and will benefit from increased purchases of Mont Belvieu propane and butane.
Normal butane’s risks overlap with propane’s, but it does have some quirks. The U.S. government already took some action to allow more butane to be mixed into gasoline this spring. That’s near-term helpful. But there are a lot of refineries reducing utilization rates, and they are probably trying to minimize gasoline production. By this fall, when it’s time to blend more butane in gasoline again, it’s possible there are fewer gallons of gasoline available (compared to previous years) to absorb some of the excess butane.
Later this year, that same export capacity mentioned in the propane section is also available for butane exports. Let’s hope for increased global demand.
NGLs have some trouble in the next few months. The most important factor is going to be the price of oil. Second to oil, it is worth watching two things: How fast does demand for NGLs return, and how fast do associated-gas and rich-gas volumes declines. In 2021, the drop in gas production may lead to better NGLs pricing.
We continue to monitor oil, gas, NGLs, and regional markets for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact firstname.lastname@example.org. Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at email@example.com.
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