Both natural gas liquid (NGL) and frac spread prices are expected to struggle in early 2013. November 2012 was not a good month either, and December was even worse as ethane turned negative at both hubs. Macro-economic woes, including the looming “fiscal cliff” in the U.S. and concerns over the security of Middle Eastern oil supplies, were keeping certain U.S. energy prices at a stagnant level as 2012 closed.

This was especially true for crude oil and heavy NGLs, which are closely related to crude. For much of November, crude prices hovered around $85 per barrel (bbl.). While this isn’t an outstanding price, its stability supported prices for heavy NGLs.

While petrochemical demand should increase as more cracking capacity is brought online, the NGL market should 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.

graph- current frac spread

Until a sustained improvement in propane prices begins ethane will continue to face rejection throughout the U.S.

By the end of November, it was reported by En*Vantage’s Weekly Energy Report that there was widespread rejection in the amount of at least 150,000 bbl. per day and this could increase to 200,000 bbl. per day 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.

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 this month.

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

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