Lower oil prices and rig counts will make for lower volumes and prices for natural gas liquids (NGL) for a while, analysts at Raymond James & Associates Inc. said Monday.

"...[W]e are expecting NGL supply growth to continue, albeit at a reduced pace relative to our prior model," Raymond James analysts said in a research note. "Specifically, we are now forecasting an approximate 150,000 b/d annual increase through 2015...[W]e expect that 2015 NGL production will be up about 25% from 2011 (about 2.95 million b/d versus our prior model of about 3.15 million b/d), with total NGL pipeline capacity forecast to increase by over 60% (about 2.4 million b/d currently to about 3.9 million b/d by mid-2014), providing ample capacity to keep pace with incremental volume growth."

Lower expected West Texas Intermediate (WTI) crude prices and the consequent impact on rig count and production trends prompted the analysts to lower their average NGL price estimates. The Raymond James team forecasts that the composite NGL price will decrease through the second half of this year and into next year with the 2Q2013 bottom hitting an average of 64 cents/gallon. A rebound will occur in 2014 to an average of 80 cents/gallon, they said.

"...[O]ur 2014, 2015 composite NGL prices of 80 cents/gallon and 88 cents/gallon remain conservative, reflecting average ethane price ranges of 25-30 cents/gallon and 30-35 cents/gallon, respectively," they wrote. In late June the Raymond James analysts had said the outlook for wet gas drillers would be bleak until the second half of 2014 and through 2015 with NGL pricing down "meaningfully faster as many wet gas plays are more marginally economic when compared to oil" (see Daily GPI, June 26).

As far as what determines prices for NGLs, the most important factor is the NGL-to-crude oil relationship, they said, adding that "it's weakening." Last month analysts at Wells Fargo Securities wrote about the undoing of the NGL-crude price relationship (see Daily GPI, June 13).

The Raymond James team wrote that petrochemical and refined petroleum product markets set NGL prices in competition with oil-based feedstock competitors while natural gas prices set the price floor for NGLs. "Thus, when modeling ethane's competitive cost advantage versus alternative feedstocks (naphtha, gasoil, etc.), it is very important to consider the NGL barrel as a percentage of crude oil, as well as ethane relative to crude oil.

"Given our recent commodity price deck revisions forecasting lower oil prices for a longer period, we continue to expect that the gas-to-crude price ratio on a Btu basis will remain below 50%; however, we are now modeling an approximate 40-45% relationship, on average, through 2015."

Last month an analyst at Standard & Poor's Ratings Services noted the much cheaper prices for ethane and propane relative to naphtha and gasoil. While this might indicate robust demand for the former, other factors keep ethane prices and NGL prices in general down, they said (see Daily GPI, June 15).

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