Bank of America Merrill Lynch said Monday the outlook for US propane prices heading into 2013 was stronger than that for ethane due to the latter's oversupply issues and weak cracking margins.
In a note to investors, the bank said the US propane market would rebalance in 2013 from its current excess of supply as greater export opportunities opened up and winter heating demand recovered.
The bank added that while propane in the US has a broad production base, which would ensure amply supply, a normal winter would support demand growth on a year-over-year basis.
Ethane margins, on the other hand, have contracted sharply as producers attempt to clear the supply glut by leaving ethane in natural gas, rejecting nearly 160,000 b/d of opportunities, which has led to some price stabilization as inventories scaled down.
Ethane prices are not likely to trade above natural gas by much more than the cost of fractionation, it said, as limited ethane cracking capacity will keep demand low.
Beginning in 2013, the spread between ethane and propane will likely widen compared with current levels, as propane renews its correlation with crude oil, and traders meet export-led demand.
The expected surge in exports will also narrow the difference between prices of propane at Mont Belvieu, Texas, and in Northwest Europe, it added. Currently, Mont Belvieu propane is trading at a 49% discount to European levels, compared with a discount of 1% between 2002 and 2009.
The bank sees US propane export capacity expanding by 117,000 b/d by the end of 2012, and an additional 60,000 b/d to 325,000 b/d in 2013.
Early Monday, Mont Belvieu ethane was trading at 33.50 cents/gal, while propane was trading at 97.25 cents/gal.
