Strengthening of natural gas liquids (NGL) prices, namely those for ethane, will continue for the near term, according to analysts at Wells Fargo Securities. But further out, supply and demand issues will make for lower prices, although not as low as some in the industry believe, the firm said in a recent note.
"The recent bearish tone by E&P [exploration and production] companies and other market participants forecasting a 40% NGL-to-crude ratio for 2011 appears overdone, in our view," the analysts said. "While we forecast NGL prices (specifically ethane) could come under pressure in 2011-2012 due to an anticipated wave of incremental NGL supply from fractionation capacity expansions, we do not believe the NGL-to-crude ratio (at Mont Belvieu, TX) will fall below 50% on a sustainable basis."
Since the end of June the price of ethane at Mont Belvieu has increased 11% to about 52 cents/gal, they noted. Further strengthening is expected by the Wells Fargo team during the remainder of the year based on an ethane inventory correction, tight fractionation capacity and a wide crude oil-to-natural gas price ratio.
However, longer term the analysts said they are more cautious on ethane prices due to increased supply and limited incremental demand.
Wells Fargo analysts cut their Mont Belvieu NGL price assumptions for this year, 2011 and 2012 to $1.07/gal, $1.09 and $1.06, respectively, from $1.11, $1.16 and $1.09. They assume an NGL-to-crude ratio of 56% for 2011 and 2012, which is lower than their previous estimate of 57-58%. The change is due to lower expectations for ethane prices based on the belief that fractionation capacity (ethane supply) could equal or exceed slightly ethane cracking capacity next year and in 2012.
"...[W]e calculate an ethane price of 50 cents/gal in 2011 and 48 cents/gal in 2012, or 4-8% downside from the current level," the analysts said.
The Wells Fargo analysts aren't the only ones casting an eye toward cracking capacity. Raymond James was decidedly bearish in a recent note on NGLs, predicting a glut similar to what the industry is experiencing with natural gas (see Daily GPI, Aug. 24). "Eventually, a limit will be reached as to how much ethane can be cracked, and we believe the industry is rapidly approaching that limit," Raymond James analysts said.
However, early last month executives at midstream player Oneok Partners LP were predicting continued strong demand for NGLs from the petrochemical industry (see Daily GPI, Aug. 5). "There's been a lot written about the potential for a glut of NGLs, specifically ethane. In our view, we believe that ethane supply and demand will remain relatively balanced over the next couple of years..." said Oneok Partners COO Terry Spencer.
Meanwhile, consultant Bentek Energy LLC recently said it foresees ethane offtake challenges in the hot Marcellus Shale that could put a crimp on gas production there (see Daily GPI, Sept. 13).
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