The ethane price premium to natural gas has nearly tripled over the past three months

Ethane prices at Mont Belvieu, Texas, from August 1–28, 2018, averaged $2.38 per million British thermal units (MMBtu) higher than natural gas spot prices at the U.S. benchmark Henry Hub in Louisiana during that same period. This differential has nearly tripled since May 2018, when the ethane premium was 80¢/MMBtu.

Before 2013, ethane prices trended higher than natural gas prices. However, from about 2013 to 2016, when ethane supply exceeded demand, ethane spot prices were generally lower than Henry Hub natural gas spot prices. Since mid-2017, ethane prices have again been consistently higher than natural gas prices as domestic and foreign consumption of U.S. ethane has grown.

U.S. exports of ethane increased from marine export terminals that came online in 2016. According to EIA’s most recent Petroleum Supply Monthly data, U.S. exports of ethane averaged more than 280,000 b/d in May 2018, a year-on-year increase of 48%.

In addition, U.S. ethane demand growth has accelerated since the beginning of 2018, when new and expanded ethylene crackers began operations. These facilities convert ethane into ethylene, a compound used in the production of plastics, resins, and other chemicals. Chevron Philips Chemical began operation of its new Cedar Bayou, Texas cracker in March, and ExxonMobil began operations of its newly-built Baytown, Texas cracker at the end of July. Both facilities are close to the Mont Belvieu hydrocarbon gas liquids trading hub, where ethane spot prices are set.

The increased ethane demand in both global and domestic markets is expected to continue in the short term, and it has pushed production farther from demand centers, which has strained the capacity of existing pipeline and fractionation infrastructure. These infrastructure constraints have likely contributed to the increase in price.

Ethane is one of several natural gas plant liquids (NGPL) that are found in raw natural gas. Although heavier NGPL such as propane, butanes, and natural gasoline must be removed from raw natural gas before it is put into interstate pipelines, some ethane can be left (i.e., rejected) in pipeline-quality natural gas. The economics of rejecting ethane follow the ethane-to-natural-gas price differential, so when ethane prices are significantly higher than natural gas prices, producers achieve higher revenues by extracting ethane and selling it separately. As a result of rising U.S. ethane prices, ethane output from natural gas processing plants continues to grow, exceeding 1.7 million b/d in both April and May 2018.