Over the next 12-18 months natural gas liquids (NGL) prices will come under pressure from growing supply and the inability of the petrochemical industry to crack all the output from gas industry fractionators, according to analysts at Raymond James. However, longer term ethane and other NGLs are well positioned to compete with heavier feedstocks derived from crude oil, they said in a note Monday.

"...[C]oncern is growing that a supply glut in NGL markets, similar to what has unfolded in the natural gas markets could lead to a prolonged period of depressed NGL prices. We believe that these concerns are well founded," the analysts said in a note.

The ability of the natural gas midstream to process gas and fractionate NGLs will outstrip the petrochemical industry's ability to crack NGLs. "Eventually, a limit will be reached as to how much ethane can be cracked, and we believe the industry is rapidly approaching that limit," they said.

The analysts forecast that weighted average NGL prices will decline 10-15% during the second half of this year compared with the first half; a 10% decline in prices is expected to follow in the first half of next year, with the price curve flattening in the second half of 2011.

But longer term the future looks bright for domestic NGL producers due to a shift in natural gas prices relative to crude. Raymond James projects the crude-to-natural gas price spread to average 17.5 to 1 for 2010 and 19 to 1 for 2011. "...[T]his pricing divergence stands to keep NGLs' cost basis relatively low versus crude-based alternatives," the firm's analysts said.

That's something that many in the gas industry are counting on as petrochemical markets come to the realization that the Lower 48 can be a reliable source of cheap NGLs, which is something Enterprise Products Partners LP Chief Commercial Officer Jim Teague said recently he's observed (see Daily GPI, July 27).

The Raymond James analysts noted two "wild cards" in the NGL outlook. One would be a strengthening U.S. dollar and the other "a sharp increase" in the cracking capacity of Middle East and Asian markets.

Expansions in the Middle East and Asia could increase global cracking capacity 5-10%, which could trigger a substantial pullback in U.S. ethylene exports, the analysts said. "If North American petrochemical producers begin to lose share in global ethylene markets, demand for ethane could soften and further reduce the market's ability to absorb the expected growth in NGL supply over the next several years," they said.

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