By Timothy Puko
Sinking oil prices are taking propane, butane and other products
used in the chemicals industry and home heating along with
them.
The fuels, called natural-gas liquids, are a byproduct of oil
and gas drilling and are used to heat homes, fire up grills and
make plastics. So-called NGLs have been a source of profits for
energy producers because their prices, until recently, stayed high
even as natural-gas prices dropped. Chemical companies have
expanded their U.S. production to take advantage of plentiful
supply.
But prices for NGLs--which include ethane, propane, butane,
isobutane and natural gasoline--have turned sharply lower in recent
months. From Sept. 1 to Dec. 15, the price of all the
aforementioned NGLs except ethane dropped at least 40%, according
to Oil Price Information Service. Ethane prices dropped 23%.
Prices for the fuels are closely linked to oil, so a sharp drop
in crude prices has exerted downward pressure. A glut in the U.S.
is also weighing on these markets. Propane and butane are at more
than 10-year lows, down nearly half since the start of September,
according to Oil Price Information Service, which tracks these
markets.
The low cost of propane will help the roughly 5% of American
households that use the NGL for heating to save anywhere from 20%
to 34% this winter, the U.S. Energy Information Administration said
recently. Producers in the U.S. Northeast are likely to be among
the biggest losers from the retreat, according to Citigroup Inc.
These companies had stepped up drilling in NGL-rich areas in Ohio
and Pennsylvania, counting on the fuels to add several dollars to
the value of every barrel of oil produced. But pipeline space to
carry NGLs out of the region is limited, which is expected to
worsen a regional glut, Citi said.
"Things look pretty ugly overall," said Francisco Blanch,
commodities and derivatives strategist at Bank of America Merrill
Lynch. "It really is an amazing amount of supply, and it's very
difficult to place fast. That's created consistent selling
pressure."
Many chemical companies were relying on a cheap supply of NGLs
to give them a competitive advantage over companies abroad that
rely on the oil product naphtha. But as oil falls and naphtha also
becomes cheaper, it erodes some of the competitive advantage NGL
users had counted on when they budgeted billions for expansion
projects.
Surging U.S. operations for LyondellBasell Industries NV and Dow
Chemical Co. have made them two of the biggest beneficiaries of the
shale boom, but now they could be among the biggest losers of the
continuing oil-price crash, Credit Suisse said. LyondellBasell
shares have shed 28% of their value since early September; Dow has
lost 16%.
LyondellBasell's Sergey Vasnetsov, senior vice president of
strategic planning and transactions, said his company's U.S.
business remains "quite profitable" at current crude oil, NGL and
natural-gas prices.
Dow has plants around the world that can benefit from low oil
prices, its officials said. They also believe investors are wrong
to think NGL-fed plants in the U.S. wouldn't have advantages if all
those fuels have dropped in price.
"The net effect is that in the long term, a more stable oil
price and stable markets will drive GDP growth and consumer
spending, which is a good thing for Dow," said Mauro Gregorio,
Dow's president of feedstocks and energy.
Falling NGL prices have been a draw for traders. The number of
outstanding propane futures contracts on the New York Mercantile
Exchange has quadrupled since May. Propane futures ended Friday
down more than 50% for the year.
As oil markets collapsed, energy and commodities firm Vitol
Group became one of the big NGL sellers, according to people with
knowledge of its trading. One of those people said Mercuria Energy
Group and BP PLC have also been taking positions that would benefit
from falling prices.
Vitol and BP declined to comment. Mercuria didn't respond to
requests for comment.
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