Mont Belvieu C5 volatility points to tight market

OREANDA-NEWS. April 23, 2015. Gulf coast natural gasoline prices have seen significant volatility three times in April, a sign of prolonged supply/demand imbalance caused by hedging, infrastructure outages and possible exports.

April delivery prices jumped from 114?/USG on 2 April to a 121-121?/USG on 8 April, then up again to 134-136?/USG on 16-20 April.

EPC natural gasoline's April/May backwardation has spiked sharply on three occasions, with the spread reaching 7-10? on 8, 15 and 20 April. Each time, natural gasoline's outright delivery price surpassed WTI's settlement value.

EPC natural gasoline's price normalized to 128.375?/USG today, or 96pc of WTI.

Hedging, infrastructure outages and possible exports could be causing the volatility, market sources said.

Traders use Mont Belvieu natural gasoline to hedge light-paraffinic naphtha positions because it trades at a differential to EPC natural gasoline. Consequently, hedged positions can cause an increase in trading demand at the end of the month when participants must balance their books, whereby firming market prices.

Since hedgers are not always daily participants in the natural gasoline market, their activity can offset supply and demand fundamentals by creating short-term shortages or surpluses. Some participants are skeptical that hedging has caused market tightness because a hedger must eventually close out their position, returning the barrels to the spot market.

Infrastructure outages may have contributed to the market volatility, participants told Argus. Enterprise Products Partner's 85,000 b/d fractionator VII went offline for several days, starting on 12 April, coinciding with an 8.5?/USG day-on-day jump in natural gasoline prices, from 14-15 April.

Then, over this past weekend, discussion emerged of a possible fractionator outage at Oneok's facilities at the Gulf coast. Oneok would not confirm the facility outage, though the event once again coincided with a spike in natural gasoline prices, which reached 136.75?/USG on 20 April before reverting to 126.5?/USG by close-of-market on 21 April.

While infrastructure outages might seem like an easy causal link to make, many market watchers are unconvinced, arguing that the outage's impact should be noticeable across multiple markets. Still others rationalized that the fleet of Mont Belvieu fractionators have enough available capacity to counterbalance a disruption.

Unconfirmed reports have also circulated of off-spec production contamination being the cause of the supply shortage at the end of March, participants have told Argus.

The third discussed possibility is exports. Market participants told Argus that US natural gasoline is being exported to Asia and Latin America, but no such cargoes have been confirmed. Exported natural gasoline often leaves US shores classified as naphtha due to specification similarities between the NGL and light paraffinic naphtha. Colombia has already tendered to buy more than half a million barrels per month of light naphtha for diluent with 9-12 RVP in April. The most recent Colombian import tender sought at least one 180,000 bl cargo available 7-25 April. A US refiner was heard awarded the supply tender.

The Conway, Kansas, natural gasoline market has mostly evaded price volatility, though the market did jump 5? day-on-day from 14 to 15 April. As the price differential between the midcontinent and Gulf coast hubs has calmed, a handful of location spreads traded when the market was at a 6-7?/USG differential. Spot market liquidity in the midcontinent market is more closely tied to the WTI to natural gasoline price spread, which – if wide enough - can allow for blending.

Light straight run (LSR) naphtha liquidity was an unexpected casualty to natural gasoline volatility. LSR, or light paraffinic naphtha, typically trades at a premium to EPC natural gasoline, but the spread drifted to a discount as natural gasoline prices jumped earlier in the week. Traders consequently retreated from the market, choosing to wait for price movements to steady rather than exposing themselves to basis risk.

As EPC natural gasoline priced higher, prices at the Lone Star terminal jumped as well, affecting the feasibility of Gulf coast shipments to Canada. With LST natural gasoline prices supported by volatility in the EPC market, the spread between Canadian condensate and the US Gulf coast looked less economic, shrinking from 11.31?/USG on 1 April to 3-4?/USG from 16-20 April. LST natural gasoline is often priced off spread trades between the EPC and LST terminals and usually holds a premium. However, LST natural gasoline traded several times at a discount on 20 April after the April/May spread widened. LST natural gasoline is shipped north to Canada for use as a diluent, mostly on term-contracts.

Natural gasoline traded heavily today, but the price was range-bound to 127.125-129.5?/USG. April/May backwardation was pegged at 4?/USG.

At the end of March, natural gasoline prices surged 31? in a single week from 111.125?/USG on 20 March to 142.8?/USG on 27 March as several market participants found themselves short at the end of the month. In the second half of March, the natural gasoline held a premium to WTI of 0.02?/USG to 27.667?/USG.