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A Checkup on the Ethane Market

June 21, 2018 | Robert Applegate

There has been a lot of movement in the ethane market recently. Mont Belvieu ethane prices hit levels not seen in four years. Flows on Mariner East 1 have been shut down, and then restarted, then shut down again, and recently received approval to start again. New crackers have come online in the Gulf, and more are slated for in-service later this year. Mariner East 2 construction was halted, further delaying another outlet for Northeast ethane.

In this edition of Get the Point, we will diagnose the overall health of the ethane market and explore the prescription for ethane going forward.

Price

To begin our diagnosis, we must check the symptoms, and price is typically the most obvious mark of how the market is doing. There was a time when ethane hung with the cool kids, climbing with natural gas liquids (NGL) prices and sliding when they slid. Those prices would more often than not move with oil prices as well -- most easily seen by converting each hydrocarbon price into its dollar per MMBtu ($/MMBtu) equivalent and then looking at the relationships.

Until late 2008, when the gravity of the fracking boom really hit the market, nearly all NGLs were trading close to oil on a $/MMBtu basis. Through the late 2000's and until the end of 2011, ethane was still hanging out with the NGLs. But then 2012 came, and ethane began its identity crisis. By the end of 2012, ethane was was running low and slow with natural gas, rather than NGLs, where it stayed for about three years. In 2016, ethane prices split off from natural gas on a $/MMBtu basis and stayed somewhat consistently distanced until this year.

So far, 2018 has seen the ethane price above levels seen for many years. The graph below shows the interplay in recent years and months. To understand it deeper, we must dissect the market, starting with supply.

Source: OPIS PointLogic

Supply

The substantial growth in ethane supply is not news (see graph below).

As the price of gas fell, producers targeted the wetter plays to gain the extra money from oil and NGLs. This rapid growth is directly tied to the drop in ethane prices on a $/MMBtu basis. As the rapid increase of ethane supply hit the market, the price dropped and disconnected ethane from the rest of the NGLs, tying it closer to gas. This was a supply-driven trend.

Source: OPIS PointLogic

The surge in supply came on so quickly that even processing and recovering all of the new ethane became difficult, resulting in a rapid increase in ethane rejection (see graph below). As ethane rejection grew in 2012, the separation of the price from NGLs grew. This further tied ethane to natural gas prices and, ultimately, created ethane rejection as its own indicator of the health of the demand side of the equation.

Source: OPIS PointLogic

Demand

Whether ethane rejection is treated as "demand" or "negative supply" for the ethane market, there were a lot of changes within the demand side of the equation as well. Looking back at the $/MMBtu graph, the market seemed to find a new normal from the beginning of 2013 through the end of 2015. This new normal was that ethane and natural gas were traded on nearly the same $/MMBtu basis, and that as far as burning the hydrocarbon, ethane was natural gas, and anything that could be rejected would be rejected.

With the onslaught of cheap ethane, a few solutions were proposed: debottlenecking steam crackers, building new steam crackers, and selling the ethane to Europe and Asia (which had never been done before). When the first waterborne ethane exports began in early 2016, the market changed substantially, and ethane prices separated from natural gas once again.

Source: OPIS PointLogic

The debottlenecking of existing units is nearly finished and new units are coming online, so we could expect that ethane prices will returned to their normal relationship to gas. But other factors also have been in play, as we’ll discuss further below.

Storage

In recent years, supply remained high and demand was only slightly up from increased exports, so storage continued to climb. Even with new export-based demand, 2016 held the record for the highest ethane stock levels ever seen. Then, 2017 set new records. This brings us to the present day, when the first two months of 2018 held even higher stock levels than previous years, as shown in the graph below.

Sources: OPIS PointLogic and EIA

 

Today’s Market

So, here’s where the ethane market was earlier this year: oversupplied, overstocked and under-demanded. But things have changed, as 2018 has seen record ethane demand and, as a result, a further increase in the separation between ethane and natural gas on a $/MMBtu basis (see graph below).

Source: OPIS PointLogic

Based on IHS Markit (IHSM) data, U.S. waterborne ethane exports averaged 33 thousand barrels per day (Mb/d) for March 2016 through December 2016, and 129 Mb/d for 2017. For this year (through the end of June 2018), U.S. waterborne ethane exports are averaging nearly 180 Mb/d, their highest level ever. These record exports have occurred even during times when Mariner East 1 has been not operational, which resulted in the shuttering of ethane exports from Marcus Hook, Pa.

Additionally, as exports have reached record levels, new steam crackers have come online. World-scale crackers can use more than 80 Mb/d of ethane, and in March of this year, CP Chem’s Cedar Bayou cracker in Baytown, Texas began producing ethylene. ExxonMobil also announced that the first production from its new ethane cracker at Baytown will begin this summer. With other steam crackers expected to come online in the next four years, will this increased demand be the savior of ethane prices and bring ethane prices closer to its fellow NGL compatriots and away from natural gas?

The answer is “maybe” (as might be expected). Current estimates of ethane rejection in the U.S., even with the record exports and ramping up of the aforementioned steam crackers, are over 600 Mb/d and even over 700 Mb/d, depending on which estimates are most accurate. If every steam cracker that was proposed came online, that would put a significant dent in the available ethane currently being rejected.

Assuming current projects ramp up as scheduled and come online as scheduled, IHSMt currently has ethane utilization by steam crackers growing by over 250 Mb/d by the end of 2019. OPIS PointLogic has ethane production forecast to grow by approximately 350 Mb/d by the end of 2019. Combining the two trends indicates that there is and will be plenty of ethane available for new crackers. The issue for the ethane market, then, no longer is with ethane itself. There’s more than enough ethane available.

The Prescription

The main issue comes down to demand: What happens to ethane’s main consumable product, ethylene?

When CP Chem started ramping up its new cracker, OPIS reported that the surge of new ethylene capacity coming on-stream pressured the ethylene production margins on the U.S. Gulf Coast; CP Chem reportedly idled a small 560 million-lbs. per year cracker at its Sweeny complex in Texas in May because Gulf Coast spot ethane and propane cracking margins fell below standalone breakeven levels.

As McDonald’s and other global restaurant chains look to end single-use plastic straws in its restaurants, this begs the question, “how much ethylene does the world need?” The margins in the ethylene market could result in companies idling their least-efficient steam crackers while bringing online more efficient, newer crackers. This would curb ethane demand growth and further perpetuate the current state of the ethane market. In the end, ethane could very much remain oversupplied, over stocked and under-demanded.

To track ethane production and rejection levels on a daily basis, please visit OPIS PointLogic’s NGL Module on our client site and stay tuned as we explore its supply and demand fundamentals every week in our NGL Weekly publication.