While negative oil prices and a continued growing concern of crude storage shortages have grabbed headlines, BTU Analytics has been busy understanding how the shock to the oil markets will also impact adjacent markets. Last week, we highlighted the impact of oil curtailments on gas production. This week we want to spend some time looking at the impact of curtailment to NGL (Natural Gas Liquids) production. NGLs are produced as a byproduct of oil and gas production, and prices have historically been correlated to crude for C3+ (propane, I-butane, N-butane, natural gasoline) or Henry Hub for Ethane. However, with the recent volatility in the oil markets, pricing relationships are breaking down as NGL supply, particularly propane, has fallen faster than global demand.
Focusing on Liquefied Petroleum Gases (LPGs) which are a subset of the C3+ category of NGLs and typically refers to butane and propane (see here for more on US LPG exports). Of global LPG supply approximately 35% is sourced from refineries and 46% of the demand for LPG is from residential and commercial use. As global refinery runs have plummeted in response to demand destruction from COVID-19, so too has LPG refinery production and thus supply to serve residential and commercial demand. The chart below shows Mont Belvieu NGL purity product prices as a percent of WTI on the left and various oil prices relative to propane prices on the right.
Prior to widespread global shutdowns, propane at Mont Belvieu averaged 32% of WTI. As the spread of the coronavirus continued, propane and NGL prices at Mont Belvieu continued to surge as a percent of WTI, peaking at over 120% of WTI shortly after WTI prices went negative on April 20, 2020. Looking one step further into propane prices and comparing US Mont Belvieu propane, WTI crude, Brent crude, and NWE European propane highlights the current global propane shortage. For much of April, NWE European propane has traded at parity or at a very small discount to Brent crude compared to an average $27/bbl discount for 1Q 2020.
Compounding the potential shortage are supply curtailments as producers and nations shut-in oil production. In the US, almost 70% of C3+ production came from the Permian, Bakken, Eagle Ford, DJ Basin, PRB, and SCOOP/STACK in 2019. Therefore, the impact of curtailing oil and associated gas this summer will have significant implications for NGL supply. The chart below highlights the difference in our updated C3+ forecast that included production curtailments relative to our previous forecasts. Production is expected to average almost 0.5 MMb/d lower than our outlook prior to COVID-19.
While there are many moving pieces to consider, support for NGL prices has been, and could remain, a small silver-lining. For more information on US regional NGL supply forecasts and production curtailment forecasts request a sample of our Upstream Outlook Report.