-Many natural gas processors have contracts that are sensitive
to prices in natural gas and natural gas liquids (NGLs).
-Frac spreads reached ~$30/barrel in mid-February but have
recently traded down to current levels of below $23/barrel.
-On a week-over-week basis, the metric increased by 6% for the
week ended June 14, from $23.99/barrel to $22.64/barrel.
Some market participants view fractionation spreads (also called
"frac spreads") as one indication of the profitability of some
natural gas processing companies. Frac spreads are dependent on
natural gas liquids (
) and natural gas prices, and increase when NGL prices increase
relative to natural gas prices. Generally, natural gas processing
companies such as MarkWest Energy (
), Targa Resources (
), Williams Partners (
), and DCP Midstream Partners (
) realize more profits when frac spreads increase. Last week,
natural gas prices decreased 2%, however, most NGL prices decreased
by more which caused frac spreads to decrease.
The heavier NGLs (such as natural gasoline) tend to trade
directionally with crude oil, which increased last week as did
natural gasoline. Additionally ethane tends to trade more in line
with natural gas, which declined on the week, though certain NGL
specific dynamics could have caused the steep declines in ethane,
propane, and butane this week.
As aforementioned, the commodity price movement ultimately
resulted in a lower frac spread week-over-week. Natural gas prices
fell slightly on the week and news sources speculated that traders
anticipated milder weather creating less natural gas demand as well
as a greater than anticipated increase in natural gas inventories.
Meanwhile, most natural gas liquids prices dropped but more sharply
than natural gas so that frac spreads ultimately traded down on the
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.
As aforementioned, the decline in ethane and propane prices has
been 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.
Once more capacity for processing ethane and propane comes
online or more NGL export capacity is constructed, this could
provide additional long term demand for these commodities and
result in higher frac spreads. Several midstream companies have
noted that they are working on such projects, however, the timeline
for the completion of these works is over the next several years.
Additionally, even if demand for these NGLs grows as a result of
completed infrastructure, the supply of NGLs also continues to grow
and if supply meets or outstrips demand, the prices of ethane and
propane may continue to be depressed. Circling back to a short-term
perspective, last week frac spreads decreased by 6%, which was a
negative catalyst. However, since early February, fractionation
spreads have decreased by over 25% resulting in a negative
medium-term catalyst for gas processors such as MWE, NGLS, WPZ, and
DPM, many of which are also components of the Alerian MLP ETF
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