US ethylene spot prices fell to multi-year lows in 2018 and remained just above production costs for much of the year as new capacity caused production to outpace consumption.
That new capacity also increased demand for feedstock ethane, which combined with export demand and logistical constraints, pushed ethane prices to multi-year highs.
US ethane spot prices broke through 60 cents/gal on Tuesday, hitting their highest level since 2012. Demand is essentially outstripping physical supply at the Mont Belvieu, Texas storage hub, causing backwardation in the futures market.
Backwardation means the front-month price for physical delivery is higher than the next month. This is generally an indicator that supplies are short or tightening up.
Ethylene spot prices tracked ethane costs higher, reaching a six-month high in early September and continuing to climb. Front-month ethylene traded at 23 cents/lb ($507/tonne) this week, its highest since early February.
Meanwhile, ethylene supply remains long and ethane remains tight, with US government figures showing Gulf Coast stockpiles at bulk terminals falling from 44.6m bbl in November last year to 33.4m bbl in June. Several more crackers scheduled to start up over the next two quarters are expected to keep ethylene long and demand for ethane strong.
The combined pressures could prompt some crackers to increase the usage of heavier feedstocks, which produce less ethylene and more co-products like propylene and butadiene (BD). However, many of the new crackers use purity ethane instead of being flexible feedstock units.
The ethylene market also could see operating rate reductions or idled units. Two crackers are off-line due to economic factors, including a Chevron Phillips Chemical unit which was shut in May and an Eastman Chemical unit which extended its turnaround in April.
“We are in uncharted waters so no idea how all this is going to play out,” an ethylene market source said.
While ethylene spot margins for feedstock ethane have been slim amid the lower ethylene prices, spot margins for feedstock naphtha have been negative since early March. The recent gains in ethylene spot prices pushed margins for feedstock naphtha out of negative territory for the week ended 14 September.
Despite the recent increase in ethane costs, it is currently the most cost-effective feedstock for producing ethylene and has been for much of 2018.
A market source estimated ethane would remain the most cost-effective feedstock if ethane prices remain below 65 cents/gal.