Ethane prices at Mont Belvieu have been on a roller coaster this year- from the lows of 10 cpg in March 2020, to 25 cpg in August, and more recently back to just under 20 cpg. A similar but more pronounced trend can be observed in the ethane frac-spreads at Mont Belvieu, which have swung from negative frac spreads to 15 cpg in August, and are now settling at just under 10 cpg. While rig counts in oiler basins west of Appalachia have declined, data suggests that ethane extraction volumes remained largely unchanged from 1Q2020 to 2Q2020. Volatility in ethane prices has therefore largely driven by idiosyncrasies and outages in the ethylene industry, while natural gas fundamentals (which impact ethane dynamics) have further contributed to the extreme volatility. Ethane prices can change fast…and it looks like the stars are aligning for ethane price uptick.

Lake Charles, Hurricanes, and Ethane

To understand ethane markets, let’s first turn to Lake Charles, which has experienced an eventful summer. The Lake Charles O&G complex is only now coming back online after enduring some nasty hurricanes. As of early October, ~20% of U.S. ethylene cracking capacity was offline due to planned and unplanned outages caused by Hurricane Laura; a large portion remains offline due to delays caused by Hurricane Delta. Hurricane Laura made landfall on August 27^th, shutting down over 0.25-0.35 million barrels per day (MMBPD) of ethane demand for weeks as exporters raced to clear debris, bring back employees, and restore electricity. Things were getting back to normal – until Hurricane Delta threatened to severely damage the Lake Charles area again.

Fortunately, Hurricane Delta did little damage to the Lake Charles O&G and petrochemical complex. We expect ethane demand to continue to recover as exports rise and ethylene plants turn the lights back on, ramping up to meet a strong export demand from the plastics value chain. With uncertain supply,  and demand starting to recover and even increase in 2021/22 as new ethane-based steam crackers come online, ethane prices are primed for an uptick.

Supply in the Permian

There are some signs that ethane supply could face near-term difficulties. Drilled but uncompleted wells, or DUCs, are showing signs of softness. DUC’s can go only so far to maintain let alone grow production. U.S. rig counts, on the other hand, have fallen nearly 69% from year-ago levels. While rig counts have ticked up in recent weeks, there’s nothing on the horizon that would suggest a crude oil recovery is imminent. With crude oil production under considerable pressure, NGLs output appears set to follow. For ethane, though there is one quirkiness – there are still ~300-350 MBPD of ethane that is being rejected in the basin at current levels of oil production, which at the right price can come to the market.  

Ethane demand is rising

Since hurricanes and tropical storms appear to no longer threaten the Gulf Coast this year, we expect that ethylene plants will come online very soon. As of this writing, Entergy has restored power to all but 2,200 customers – far below the 300,000 customers who couldn’t access power two weeks ago. We expect that restoring power to Lake Charles will lead to about 0.25 – 0.35 MMBPD of ethane demand coming back online in the very near term. There are also some new crackers coming online, adding to demand. For a more detailed assessment of the Lake Charles petrochemical complex and USGC ethane supply-demand outlook, drop us a line.

Finally, ethane demand could strengthen on two other near-term trends: rising Henry Hub natural gas prices, and a new export outlet at the Orbit terminal in Nederland. Assuming Henry Hub prices continue to show strength, floor on ethane prices will strengthen due to higher rejection price thresholds. Similarly, Energy Transfer and Satellite Petrochemical will soon bring their 0.175 MMBPD ethane refrigeration facility online (we’re hearing that they’re having some difficulties with the start-up, however). With demand rising and supply under pressure, inventories could face drawdowns, supporting prices as we enter 1Q2021 and progressively increase in 2021 and 2022.

On balance, our view is that prices will settle into a sub-25 cpg price for 4Q 2020, especially if it takes time for natural gas markets to balance, and if there are delays in ramping up cracking operating rates in the USGC. Prospects of increased etahne recoveries in 2021/22 is good news not only for the ethane producers but also for midstream companies that have invested in NGL pipelines and fractionation facilities on the Permian basin growth story.