November was not a good month for natural gas liquid (NGL) prices and frac spread margins and it is likely that both will struggle for the final month of 2012 and in early 2013.
While petrochemical demand should increase as more cracking capacity is brought online, the NGL market will continue to struggle in the near-term before finally seeing some light in mid-to-late 2013 and turning the page in 2014.
The big question now is what sort of winter can we expect? Another warm winter, even one not as bad as last year, would really hurt both the natural gas and NGL market as both could be vastly oversupplied. However, a normalized winter would increase heating demand and cause both natural gas and propane prices to increase and help balance both markets.
Until a sustained improvement in propane prices begins, ethane will continue to face rejection throughout the U.S. In November, Conway ethane remained at a negative margin. Although the Mont Belvieu margin was theoretically positive, the reality is that once transportation costs are factored in, the margin was negative.
By the close of the month, it was reported by En*Vantage that there was widespread rejection in the amount of at least 150,000 bbl. per day and this could increase to 200,000/bbl. by the end of the year.
Wells Fargo Securities stated that while ethane demand has improved in the second half of 2012, pricing has not followed. “We continue to believe that low propane prices will act as a ceiling to any potential improvement in ethane prices. Absent a meaningful improvement in propane prices, which we do not believe will occur until early 2013, we believe Mont Belvieu will trade relatively close to fuel value,” the investment firm said in its November NGL Snapshot.
The report anticipates this price rally to be short-lived as ethane will again come under pressure in the second-quarter of 2013 as new fractionation facilities at Mont Belvieu will add incremental volumes to the market.
Overall, ethane prices are expected to struggle until new cracking capacity is brought online in 2017 as fractionation capacity is coming online faster than ethane cracking capacity.
Propane margins took a downturn of 23% at both Conway and Mont Belvieu in November, but remained solidly positive even with an oversupplied market. Next year should see improved prices for propane as the market is expected to be only modestly oversupplied.
According to the Wells Fargo report, the propane market could return to balance by 2014 due to Enterprise Products Partners’ propane export expansion, which is expected to come online in January 2013. In fact, if propane arbitrage differentials continue to favor exports, the report said that the market could be meaningfully undersupplied by 2014.
While light NGL prices and margins were down in November, heavy NGLs showed more life as that market has remained balanced even as crude prices flatten. Refining demand has remained stable for heavy NGLs, and the market has continued to separate from a strict correlation with crude prices.
Butane should experience increased export demand in the coming years, which will help alleviate any fears of a long-term oversupply situation. The isobutane market should also remain balanced in the long-term despite increased supplies from natural gas processing plants as isomerization facilities are expected to decrease their utilization, according to Wells Fargo.
Contact the author, Frank Nieto, at fnieto@hartenergy.com
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