We should mention up front that the prices for the five “purity products” in the NGL basket are influenced by different things. For example, ethane prices are impacted primarily by steam-cracker demand and the price of natural gas (See Return to the Ethane Asylum), while ups and downs in normal butane, isobutane and naturas gasoline prices closely track those for crude oil. And propane? It’s price-influencers are more complicated. (More on this in a moment.)
Figure 1 shows the frac spread since 2007, dividing the past 16 years into seven major eras to help explain what was happening in each and how energy markets responded to the shifts in value:
2007-08 – During the boom before the financial crisis, crude oil prices rocketed to $145/bbl and took NGLs along for the ride — the frac spread blew out to $12/MMBtu. But in a flash the boom in crude went bust, sending oil prices as low as $40/bbl and (for a short time) the frac spread below zero. (Crazy times!)
2009-12 – These were the golden years for gas processing and the frac spread. After the financial crisis, crude rebounded to more than $100/bbl and again pulled NGLs up with it, but natural gas prices crashed with Shale-Era-induced oversupply. The frac spread shot up to $13/MMBtu, and a slew of new gas processing plants were built in “wet-gas” shale plays.
2013-14 – All the new gas processing capacity flooded the market with NGLs and (unfortunately) there was little NGL export dock capacity or incremental petrochemical demand to relieve the oversupply. NGL prices crashed and — no surprise — the frac spread did too.
2015-18 – Over the next four years, the industry responded to dirt-cheap NGL prices by growing demand through the development of new petchem plants and export docks. It worked: by the end of 2018, NGL markets had tightened again, helped along by a temporary shortage of fractionation capacity in the fall of 2018 that limited supply. The frac spread ramped up from $3/MMBtu to $8/MMBtu, but only held that level for a few days.
2019-20 – It took less than a month for the frac spread to drop to $2/MMBtu, with the reversal partially due to a huge run-up in natural gas prices during November 2018 and weakness in ethane prices tied in part to start-up delays at some of the new steam crackers. Then, through the depths of COVID in 2020, the frac spread stayed low, mostly because of extremely low crude oil prices.
Before we look at what’s been happening the past couple of years, let’s consider what the ups and downs in the frac spread during 2007-20 tell us. For one thing, they make clear that the higher the frac spread, the more value is created by extracting NGLs from natural gas. That value goes not only to producers, but also to midstream companies providing processing, transportation and fractionation services and to end-users who enjoy the benefits of growing supplies of NGLs. Just as important, though, is the signal that a major shift in the frac spread sends to the broader market. When there is a huge change in the cost of a process input relative to the price of a process output, there will be big winners and equally big losers, both in terms of assets and investors in those assets. That’s a key reason why we believe that following the frac spread is a good way to keep your finger on the pulse of the whole gas midstream sector.
So, why did the frac spread rise through 2021 and soar to nearly $10/MMBtu — the highest level in 10 years — in March 2022, and why did it subsequently plummet to only $1.02/MMBtu (on November 28), one of its lowest marks ever, before rebounding somewhat in the past few days? The frac spread run-up last year and in early 2022 was tied primarily to increases in crude oil and NGL prices as global economies rebounded, and then as energy markets were shaken by Russia’s invasion of Ukraine in February 2022. On March 8 and again for a few days in early-to-mid-June, crude topped $120/bbl, giving a further boost to NGL prices, but natural gas prices were still stuck within a few dimes of $4.50/MMBtu, where they had plateaued for months.
Then things went really nuts. Crude oil prices slid to below $80/bbl in late September and again in late November, while natural gas prices — driven by soaring demand for LNG feedgas — stayed elevated. After topping out at more than $9/MMBtu in August, they fell just slightly to the still-healthy $6-7/MMBtu range in recent weeks. And NGL prices? They tanked. Since June 13, when oil prices were last above $120/bbl, prices for the five NGL “purity products” (ethane, propane, normal butane, isobutane and natural gasoline — right graph in Figure 2) have declined by 28% to 44%, compared to only a 27% drop in natural gas prices (red line in left graph). (Crude oil prices — shown by the blue line in the left graph — have fallen by 34%.) Because natural gas prices and a representative basket of NGLs are elements of the frac-spread calculation, the disconnect in the relatively modest price decline for natural gas and the twice-as-steep decline for NGLs helps to explain the sharp drop in the frac spread over the past six months.
As for why purity-product prices have fallen so much, the answer is, the reason depends on the specific commodity. To start with, ethane prices are affected to a significant degree by steam-cracker demand and, with that, ethylene/propylene prices. Global demand (and especially Asian demand) for ethylene and propylene are off sharply, an estimated 15% to 20% of U.S. steam cracker capacity is offline, and the prices of ethylene and propylene are off by 29% and 39%, respectively, in the past six months. As for normal butane, isobutane and natural gasoline, they are used primarily as motor gasoline blendstocks and for other uses in the motor fuel markets, and consequently follow crude oil prices closely — hence, they've been tumbling the past few months. And propane? Its prices are affected to some degree by oil prices and by the strength (or, lately, the weakness) of the petchem industry, both in the U.S. and internationally. The downturn in petchem demand, combined with an uptick in NGL production, has resulted in a build-up in U.S. propane inventory, which has had its own dampening effect on propane prices. As a result, even with crude oil prices sagging lately, the price of a barrel of propane is now only about 36% that of a barrel of crude, That’s the lowest level in a couple of decades, other than what happened to prices during the chaos that gripped markets in the spring of 2020 when the pandemic was rampant. That ratio compares to 55% back in March and 80% in October of last year.
What’s ahead for the frac spread? Price-forecasting is a dangerous business, but barring another market shocker similar to COVID or Russia’s attack on Ukraine, it seems safe to say that crude oil prices are likely to remain rangebound as the threat of a recession is offset by a tight supply situation. Natural gas prices will stay strong due to European demand for LNG, and NGL prices will remain soft, assuming that petchem demand remains weak. All that suggests that the frac spread could hover in the low single digits, at least for a while. In other words, no new golden age for gas processing in 2023.
“Crash and Burn” was written by Nikki Sixx, John 5, Sahaj Ticotin, Tommy Lee, Mick Mars, and Vince Neil and appears as the 17th song on Mötley Crüe's soundtrack album, The Dirt Soundtrack. The songs on The Dirt Soundtrack are a collection of Mötley Crüe tunes to accompany the biographical film of the same name. “Crash and Burn” was one of two new original songs written specifically for the film and soundtrack album. It was the band’s first new release in over a decade.
The Dirt Soundtrack, released in March 2019, went to #2 on the Billboard Top Rock Albums chart and #10 on the Billboard 200 Albums chart. Production on the LP was overseen by Dave Donnelly and Bob Rock. One single, “The Dirt,” was released from the album in February 2019. It went to #8 on the Billboard Mainstream Rock singles chart. A video of the song, featuring the band and Machine Gun Kelly, who plays Tommy Lee in the film, was released at the same time as the single.
Mötley Crüe is an American heavy metal pop band formed in Los Angeles in 1981 by Nikki Sixx, Tommy Lee, Vince Neal, and Mick Mars. Six members have passed through the band since its formation. The band broke up in 2015 and reunited again in 2018. They have released nine studio albums, three live albums, eight compilation albums, three EPs and 30 singles and have sold more than 100 million records worldwide and have seven multi-Platinum albums. Mötley Crüe has won one American Music Award and have a star on the Hollywood Walk of Fame. Recently, founding member and lead guitarist Mick Mars announced his retirement from touring with the band due to health issues. Virtuoso guitarist John 5 is currently taking his place on live duties. Mötley Crüe still records and tours and will begin their Mötley Crüe World Tour 2023 in February 2023.