The bizarre case of the gallon of a petroleum liquid that costs less than a US nickel

There is a hydrocarbon out there that you can buy for less than three pennies per gallon.

But that’s something that has just happened in the past few days. And while the decline in the price of ethane-propane mix in Conway, Kansas is in a very minor niche market, it’s still like nothing anybody has seen in a long time. The price is down close to 88% since April 1.

Further, it’s not just some fluke thing that has occured because of a busted unit or a pipeline explosion, an incident that knocks the normal market balance out of whack.

Instead, the price of EP mix in Conway is a microcosm of just how the shale surge is pumping out huge quantities of natural gas liquids alongside natural gas, and how the supply is starting to overwhelm the infrastructure that exists.

EP Mix is an 80% ethane/20% propane blend. Like purity ethane, it’s used as a feedstock in olefin crackers, primarily to make ethylene.

The big hub for EP Mix, like most NGLs, is in the Gulf Coast at Mt. Belvieu, near Houston. Conway is a decidedly second-level hub.

As Platts’ Subhan Usmani wrote today about the plummeting price for EP mix at Conway:

Even with prices so low, market sources still find it difficult to predict whether EP mix has found a bottom, and many suggest that barring the occasional minor rally, there may not be any significant upward moves in prices anytime soon.

The issue cited most is the relatively isolated location of the storage hub in Conway, which has few outlets in comparison to the Gulf Coast, and fewer still that could make use of EP mix as a feedstock.

Beyond that, there is a difference in how EP Mix and ethane perform in a steam cracker; the latter is the preferred feedstock. But then again, naphtha would be preferred over ethane, but ethane’s so cheap compared to the oil-based naphtha feedstock, processors are willing to use ethane as a feedstock, despite some qualities that make it less favorable, all other things being equal.

But there’s a limit to how much of that arbitrage can go on. As the chart above shows, EP mix has nowhere been as near as weak in Mt. Belvieu as it has been in Conway, where the number of petrochemical plants that can buy it is limited.

And further, as Subhan’s reporting notes, there’s no infrastructure that allows somebody to swoop in, buy EP Mix in Conway for a price that’s getting awfully close to zero, and haul it down to the US Gulf. More expensive options, like trucking, would still be bringing EP Mix into a market that prefers purity ethane as a feedstock.

Nothing has happened in the market the last few days to make the two prices diverge so much. So what’s going on appears to be classic marginal economics, like that which sent Bakken and Canadian crude oil prices plunging a few months ago. Suddenly, the seller of the marginal barrel–the last barrel put on the market–can’t find a buyer at almost any price. So the seller has to chase buyer down the price slope, until the price finally smokes out somebody willing to purchase product.

What’s going on at Conway, Kansas is that the price at which that occurs for EP mix is way, way down that slope, almost as low as you can go.

Platts