Got ethane? Not to worry; someone will want it — now and in the future — according to analysts at Raymond James & Associates Inc. While the firm expects ethane prices to remain depressed through 1H2012, a rebound is coming in the second half of the year, and longer term the outlook is bullish for ethane demand.

“…[W]e are expecting the magnitude of NGL [natural gas liquids] production to continue at a robust pace, modeling an approximate 200,000 b/d annual increase through 2015,” the firm said in a note Tuesday. Pipeline capacity growth will be robust, too, the analysts said. Some have speculated that supply will overshoot demand from light-end crackers, creating an NGL supply glut similar to what the industry has in the dry gas sector.

However, Raymond James said the outlook suggests that the demand side will step up to the challenge to chew through growing ethane supplies during the second half of this year and beyond.

“In our view, the largest driver of increased light-end NGL preference is the relationship between WTI [West Texas intermediate crude] oil and natural gas prices, which continues to substantially decrease the competitiveness of naphtha and gas oil,” the analysts said. “While petrochemical and supply-demand fluctuations within refined petroleum products markets set NGL prices in competition with their oil-based competitors, natural gas prices set the price floor for NGLs.

“Therefore, within the context of our recently revised commodity price deck (i.e., gas-to-crude ratio on a Btu basis to remain well below 50% and ethane prices to remain very low versus crude in the 25-35% range), ethane remains positioned to provide ethylene producers with the highest margin over the long term.”

In the near term, conversion of existing crackers will be “instrumental” in balancing the market; over the longer term the largest driver of incremental ethane demand will be new builds during the 2016-2018 period, said Raymond James, which estimated about 250,000 b/d of ethane demand or an additional 7-8 billion pounds/year of ethylene productive capacity.

“For context, this magnitude of new construction could represent an almost 25% increase in ethane demand and expand the nameplate ethylene production capacity by another approximately 11-14%,” the firm said. “All in, these examples further reinforce our view that the industry is experiencing a sustainable paradigm shift in petrochemical feedstock costs (i.e., cheap and abundant domestic ethane), thus driving ethylene producers to further increase emphasis on securing ethane supplies.”

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