NGL fractionation spreads down slightly last week, bearish for gas processors
Last week saw natural gas liquids (NGL) prices move upward, a positive for some MLPs involved in natural gas processing and fractionation such as MarkWest Energy (MWE), Targa Resources (NGLS), Regency Energy (RGP), and Copano Energy (CPNO) (for why please refer to the article “Why fractionation spreads affect some MLP stocks”). However, natural gas also had strong positive momentum during the week given expectations of colder than normal weather and a larger than expected draw on inventories. These price movements ultimately resulted in fractionation spreads being down slightly (for a detailed explanation of fractionation spreads please refer to “Why fractionation spreads affect some MLP stocks”) and “An in-depth look at the mechanics of fractionation spreads”).
Note: The custom frac spread is based upon assumptions provided by Ceritas Group. To see how the custom frac spread is calculated, please refer to the article “An in-depth look at the mechanics of fractionation spreads”.
Though fractionation spreads have recovered somewhat from June 2012 lows, they’re still significantly below where they were a year ago as seen in the chart above.
For a period, frac spreads increased to $40-50/bbl due to depressed natural gas prices while NGL prices had remained relatively robust. Over the last year, frac spreads have declined largely due to the sharp drop in prices in ethane and propane (see top chart).
The decrease in ethane and propane prices is a consequence of the “shale revolution” boom, as natural gas shales rich in NGLs have experienced rapid development, resulting in the market being flooded with new NGL supply. While the excess supply of ethane and propane had been absorbed at first by the chemicals industry, much of the capacity for chemical companies to process ethane and propane has been soaked up. Future articles will further discuss the dynamics of NGL prices.
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