The gross spot cash margin for cracking ethane into ethylene on the US Gulf coast turned negative this week for the first time in ten months, according to an Argus generic model.
US ethane cracking margins bottomed at -1.1¢/lb on Tuesday. A price surge in US Gulf coast ethane prices has been the chief driver eroding margins for cracker operators over the last month, as ethylene spot prices have largely remained flat.
The price of ethane at the Enterprise cavern at Mont Belvieu, Texas, rose to a high of 39.75¢/USG on Tuesday, up by 83pc from 21.6875¢/USG on 20 June. While the price of US natural gas, which acts as a price floor for ethane, rose over this time, ethane's price surge over the last month far outstrips the more modest increase in the natural gas price.
Market participants believe that ethane's sharp price rise stems from increased ethane rejection into the natural gas stream in west Texas. Elevated natural gas prices, due to elevated summer cooling demand, drove more ethane rejection, which reduced ethane volumes reaching Mont Belvieu, driving up prices there. US ethane prices were last this high in early December, when ethane cracking margins stood at a narrow 0.6¢/lb.
US Gulf coast crackers generally consider rate cuts when ethane cracking margins fall under 5¢/lb. Ethane cracking margins have been under 5¢/lb since mid-June, but market participants had said no rate cuts had been heard well into July, although at least one cracker that was slated to return to operations after an extended turnaround.
With margins now underwater, one feedstock manager for a major producer said rates are likely being reduced at US Gulf coast crackers. Another market participant said that some crackers capable of heavier feeds had begun cracking more butane, as its cracking margins had bested those of ethane for much of the last month, but even butane's margins turned negative late last week, according to Argus' generic model.
Periods of negative ethane margins generally do not last long as crackers will cut rates to tighten the market and boost margins out of negative territory. The last period of negative ethane margins occurred in the second half of July last year, stemming from soaring natural gas prices in the wake of the Russian invasion of Ukraine. But that period of negative ethane margins lasted just under three weeks. Prior to that, the last period of extended negative ethane margins was in 2020, lasting from mid-to-late April to mid-June, when ethylene spot prices were at rock bottom in reaction to the onset of the Covid-19 pandemic.
