US traders and gas producers are mulling over the implications of higher rates of US ethane rejection as the indefinite curtailment of US ethane cargoes to China spurs fears of a supply glut of the feedstock.
Exporters Enterprise Products and Energy Transfer, the only waterborne exporters of US ethane, announced on 29 May and 4 June, respectively, that the US Commerce Department's Bureau of Industry and Security (BIS) had ordered them to apply for licenses to export ethane to China. On 4 June, Enterprise reported that emergency license applications for three of its cargoes, totaling 2.2mn bl, had been denied.
"News that the [BIS] doesn't intend to issue ethane export permits suggests an increasingly dire situation," said one market participant.
US ethane inventories stood at 63.9mn bl in March, the latest data available from the US Energy Information Administration (EIA), up 9.8pc versus last year, when supplies totaled 58.2mn bl.
The US produced 2.83mn b/d of ethane from natural gas processing in 2024, according to annual data from the EIA, resulting in a surplus of 500,000 b/d over its domestic petrochemical consumption. Nearly all of this excess is exported, and about 46pc of shipments last year, or 227,000 b/d, went to China.
Large-scale exports of the feedstock, which is used in ethylene production at steam crackers, are relatively new. Waterborne exports of ethane began in 2016, and until that time, excess supply that wasn't profitable to fractionate and pipe to storage caverns at Mont Belvieu, Texas, were rejected upstream at processing plants into the natural gas stream. Midstream operators estimated that US ethane rejection clocked in around 500,000 b/d in 2015, when the US produced a little more than a third of the ethane it does today at 1.13mn b/d and consumed only 1.07mn b/d domestically.
Some analysts fear higher rates of US ethane rejection going forward could depress natural gas prices.
"The recently announced ethane export restrictions to China have raised some concerns over a potential oversupplied domestic market, which could lead to more ethane rejection and create near-term price pressures," on natural gas, RBC Capital Markets analyst Scott Hanold said in a note to investors. An uptick in ethane left in the gas stream also pushes gas operators to potentially contend with a higher calorific content.
Natural gas producers have been investing in additional pipeline capacity to accommodate growing demand for LNG exports, however, and the infrastructure is more flexible now than it was back in 2016.
"The US exports approximately 250,000 b/d of ethane to China, and that's about 0.4bn cf/d of ethane that would need to be rejected into the US natural gas system," according to Craig Barry, Argus' lead ethylene consultant. "That should be manageable for US producers, especially as new natural gas egress pipelines come online in the second half of 2025 and into 2026."
Short-term pricing
From 28 May to 5 June, prompt-month Mont Belvieu, Texas, EPC ethane fell by 19.4pc to 19.25¢/USG, its lowest point since 13 November. Ethane's differential to its fuel value relative to Nymex natural gas at the Henry Hub turned negative on 29 May and remained negative thereafter, troughing at -5¢/USG on 4 June, the steepest discount since 15 December 2022.
A flip to rejection by gas producers is typically indicated when ethane enters negative territory relative to its fuel value in spot natural gas in the Permian. Ethane's premium to spot gas prices at the Waha hub in west Texas declined from 12.37¢/USG to 9.4¢/USG across the period, and if Waha prices remain steady, ethane prices would need to halve to enter rejection territory in the Permian. Major operators may also be incentivized, however, to reject ethane into the gas stream at greater rates if prices fall below spot gas on the US Gulf coast, according to market participants, and would need to dip below a milder 17.375¢/USG to turn negative relative to its fuel value in Houston Ship Channel gas, which it sits at its tightest premium to since 4 March at 1.88¢/USG.
Steep declines in prompt-month ethane pricing have widened the contango seen along the forward curve, possibly reflecting stronger sentiment once the US trade dispute with China is resolved. The prompt-forward month carry widened to 1.625¢/USG yesterday. June EPC ethane traded at a stronger 21.25-22.5¢/USG Friday morning, and sits at a 2.8¢/USG discount to its fuel value relative to Nymex gas, based on intraday values.
