September 19, 2019

Abqaiq Attack Has Small Fundamental Effect on NGL and Natural Gas

Stratas Advisors

Key Call: 

As a result of an attack that caused multiple field crude stabilization unit outages in Saudi Arabia, global crude oil prices have understandably gapped upwards. But on the trading day after the attack report, US gas benchmark Henry Hub prices jumped 14 cents/MMBtu (or 5%) while Mont Belvieu NGL purity prices jumped between 18% (butane) and 38% (propane).  The gas and NGL price increases are overdone and not supported by fundamentals, according to our analysis. 

Analytical Points:

The Abqaiq outage should have no effect on international gas and LNG markets since the majority of the residue gas there is used for water desalination and power and steam utilities.  Surely the plant will not be buying LNG to backfill lost residue gas at Abqaiq to make power, steam and water.    

This year, we anticipate exports of propane and butane from North America will grow substantially well in excess of the 400 Mbbl/d of supply potentially knocked offline for some time in Saudi Arabia. Terminals we see expanding or ramping exports this year include Altagas Ridley Island, Enterprise Products Houston, and Energy Transfer Marcus Hook /  Mariner East. 

Furthermore, we see significant barrels of new NGL coming into the market at new LNG facilities ramping up around the world (Inpex and others). NGL must be stripped out of the natural gas before undergoing cryogenic liquefaction.  The process of purifying gas to enable liquefaction of uber-dry natural gas at LNG plants actually yields a significant number of barrels of NGL.  Removed NGL are considerable and are a main contributor to positive economics for many LNG plant assets.   

In summary, we see no fundamental explanation for why US NGL and gas market prices should jump 20-40% on a big crude outage in Saudi Arabia.  We think it is fear or overexuberance by traders looking to make trades.  Presuming no further attacks or damage results, it seems likely that facts will triumph over fear and market NGL and gas prices will quite rapidly revert to lower levels. After all, in the US, production of both gas and NGL are tending towards new record levels each reporting period and storage is above or near 5 year average levels which should reduce an new concerns about the global risk to US NGL or gas supplies. 

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