Propane-gas spread at two year low; rebound seen

Monday, January 07, 2013

The price spread between natural gas and propane has narrowed to its lowest level in two years, but the overall supply of natural gas liquids is unlikely to decline much as a result, analysts say.

Propane normally sells at a significant premium to gas, and a wider spread creates a more favorable market for gas processors. According to independent analyst Stephen Smith, from early 2009 until early 2012, the propane-to-gas price ratio increased steadily due to rising liquids prices.

But a near-record mild 2011-2012 winter and the sharp increase in NGL-targeted drilling has led to very high propane storage levels and more than a 50% contraction in the NGL-to-Henry Hub price ratio, Smith said. The highest ratio was at $9.50/MMBtu on June 2012, while now it is around $2.50/MMBtu.

The low price ratio is not going to have a significant impact on NGL production going forward, even though "propane prices have been suffering due to the warm winter thus far, said Bentek Energy analyst Kelly Van Hull. Bentek is a unit of Platts.

During the first quarter of 2013, Enterprise Products Partners export facility expansion is due online, which will help support propane prices, noted Van Hull. Targa Resources' export expansion is also due online in late 2013, she said, and "we also are starting to get some colder weather which is already helping to support propane prices over the past 10 days.

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