The Natural Gas Liquids (NGLs) market, given its unique structure, never ceases to amaze us.
Its elastic demand determined by the price differences between various feedstocks and its supply chain are two crucial drivers to understand value in this market.
The vast supply of Natural Gas Liquids (NGLs) in North America has prompted energy companies to actively trade these products and treat these exposures as a material piece of their energy portfolio, thus increasing the demand for a better understanding of the value.
We are in the prime-heating season; the C3 curve is flat and spot hubs are flashing at the bids.
North-American NGLs hubs prices have collapsed in response to falling crude oil prices and a mild winter.
The Alberta/Conway basis represents the economic incentive to lift western Canadian propane to the US midcont by rail.
Typically you would expect the basis to narrow as heating demand picks up in the north and to widen as inventories refill, however this year pricing in the great white north was very weak, similar to what you would expect in spring.
Among the culprits:
- The reversal of Kinder Morgan’s Cochin.
- A mild winter.
- Both US and Canadian propane markets overrun with supply.
- NGLs economics re-pricing with oil economics.
- A dropping Canadian Dollar.
- Storage strategies incentivized by the challenging winter 2013-2014 and to overcome the loss of the Cochin Pipeline’s supply.
- Businesses and midstreams have written forward terms contracts priced during fall/summer 50% higher, e.g when the next-winter was priced in the curve.
- So the market pretty much overbought the curve.
In Edmonton, C3 is pricing on a par or lower than the AECO-C at below $2.50 per Mmbtu-I equivalent.
In Houston, C3 is pricing above $5.50 per Mmbtu-I equivalent, substantially higher than South Texas natural gas.
In foreign markets, c4/c3 current demand remains mild amidst an unattractive relative pricing vs naphtha feed offers.
Marcus Hook owns the Atlantic basin.
On the USAC, Marcus Hook (Mariner East) seems to have become the marginal price-setter in the Atlantic Basin. I reckon that ARA/US C3 differential is now flat since they have ramped up 3-4 cargoes per month. (on time and in line with trading expectations like a Swiss watch). The 7 figures per cargo arb in the Atlantic basin is closed, this value now remains in the Marcellus-Mariner-Marcus Hook-supply chain.
As long as Marcellus NGLs pricing remain depressed, Marcus Hook will always equal or price better the next OBO and owns the Atlantic basin.
In the USG, Nederland is loading its first cargo this month and will ramp up production quickly to up to 6-7 cargoes per month. This is beginning to take effect with time chartered tonnage as well as contract tonnage ballasting from the East.
Yet, domestic Pricing doesn’t see strong lifting effects despite these cargoes to go long-haul this spring/summer.
A key remark is that Baltic Exchange VLGC 1 Tyr T/C LPG assessment has dropped by 50% y-t-y repricing with the energy economics.
Most of the trade is conducted under one-three year basis but a category of operators continuously monitor the markets for price/physical imbalances and favor an higher exposure to the less liquid spot market.
Nominal rates spot rates ($/day) might not touch their 2014’s highs because of the order book but overall spot freight volatility will remain high.
A net shipping balance turning only slightly positive.
The net shipping balance will turn slightly positive this year but fleet utilization is projected to stay in the 90% highs.
The expected vessel supply growth is well matched to growth in demand for LPG shipping.
The U.S LPG export marginal capacity will add new 236 cargoes demand while VLGC deliveries will bring the equivalent of 235 voyages on the market in 2015 (U.S/NEAsia at 16 kts).
Many uncertainties remain unpriced in these illiquid markets.
- C2, C3, C4 utilization growth rates (%) as petchem feedstock in export markets (Asia).
- Decreasing C4 demand from Domestic refiners/blenders.
- Investment in Cheap light shale oil production and logistics infrastructure to the USAC and USG.
- Flat North-American Curve at key hubs.
The flat curve and these extra volumes will keep an increased pressure on U.S producers to seek partnerships with the world’s petchem sector in the short-term trading horizon.
The demand for gas carrier shipping is primarily determined by the supply of LPG, ammonia, petrochemical gases and derivative products.
The West-Feast LPG differential represents the economic incentive to lift U.S LPG and move it to Asian markets by ships.
Operators’ focus is the flow-trading business, they are now deciphering if West-FarEast arbs will be open this Spring/Summer.
USG f.o.b and daily rates are both pointing green lights.
The embedded trading optionality in the LPG freight remains high because the shipping position list is still very tight. When considering trading companies, keep in mind that their assets are purchase and sale contracts, which will be executed in the short-term future.
When FOB prices are low, the operator can buy some FOB and use ships / when CFR is high (e.g the optionality is fully-priced) the operators can sell freight to others. (After all, freight is a derivative which derives its value from time, assets and locations).
That means a lot: an operator can do his trading maths without necessarily having to know the buyers/sellers, address the cargo nominations months ahead.
A path symptomatic of a bigger market picture.
Clearly; although we would be very surprised to see a V-shape rebound in C3/C4 pricing, we would not be surprised at all to see the operators hitting the lpg daily T/C rate offers this Spring given the current state of the USG f.o.b and domestic Natural Gas Liquids market.
However, this might fall short to lift the domestic C3 curve for producers. As we’re hitting low prices => more products is going on storage in Canada and in the MidCont, thus only lowering the basis vs the Mt. Belvieu Balmo swap.
This winter we have witnessed NGLs re-pricing with oil economics, this path is symptomatic of a bigger market picture. As the U.S Natural Gas Liquids infrastructure and export capacity stabilize, prices will become more sensitive to global energy prices, making cross correlations more crucial than ever.
Rarely has the NGLS market, and in particular C3, been so interesting, but the next few weeks and months promise a great deal of activity and indeed risk for those in all parts of the supply chain and marketing.