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Analysts: Midstream Sector Seeing Happier Days

The natural gas liquids (NGL) market is apparently something like the weather. Don't like it? Wait and it will change.

Last November ethane frac spreads went negative as demand from petrochemical producers was down sharply due to the weak economy and hurricanes that had ravaged the Gulf of Mexico (see Daily GPI, Jan. 13; Nov. 20, 2008). "Increased U.S. gas production, coupled with the completion of NGL takeaway pipelines, has resulted in increased NGL supply, just as the U.S.economy is entering a recession and chemical [industry]/NGL demand is falling," analysts at Tudor, Pickering, Holt & Co. LLC said at the time.

"What a difference six months makes!" the analysts came back to say in an update to their November report on the midstream sector released this week. "Now, frac spreads have rebounded to [more than] $5/MMBtu, most of the idled plants are back on line (except those down for maintenance), and although not Pollyanna, companies are clearly more optimistic," wrote the Houston-based team of analysts, which is led by Becca Followill.

The analysts noted a few factors that improved the outlook for NGL margins. They are:

While the situation for NGLs has improved, "ethane still looks weak, and NGLs are trading at 50% of crude oil," the analysts wrote.

"Better frac spreads are largely a function of the crude-gas relationship rather than strong petrochemical demand," according to the analysts. "Oil is trading at about 20 times natural gas, the highest level we have seen since 1991. Rail car loadings [the group's proxy for NGL demand] have finally improved from 10-year lows, but that's not exactly great fundamentals."

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