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Morningstar | The Natural Gas Liquids Rubik's Cube Solved

In our new natural gas liquids forecast, we expect NGL production and exports of 6.7 million and 3 million barrels per day by 2022, respectively, above the consensus forecast. U.S. NGL supply will increase about 2.2 million bpd over the next five years compared with our forecast of 2.3 million bpd for oil, making it critical to continued U.S. liquids supply growth. Consensus U.S. NGL production estimates are as low as 4.5 million bpd, which implies that the U.S. cannot supply enough ethane to meet the $150 billion-plus steam cracker expansion underway, and U.S. NGL exports will actually decline from existing levels, failing to meet the 1 million bpd of ethane export contracts already signed. We expect higher international demand, particularly from China, to take advantage of lower feedstock costs and cleaner-burning fuels versus more expensive oil- and coal-derived feedstock options.

However, we do expect aggregate NGL prices to decline about 20% from current levels, reflecting our long-term view on Brent as naphtha (a competing feedstock) is oil-based. Ethane remains the exception, with our long-term pricing forecast about flat with current levels given higher export demand. We think undervalued Enterprise Products Partners is the dominant wide-moat midstream entity best positioned to take advantage of higher exports. Undervalued Targa Resources, Energy Transfer Partners, and Phillips 66 Partners are also compelling opportunities.

U.S. exports for ethane and propane should increase significantly in the coming years, given their cost-competitiveness with European naphtha and Saudi Arabian propane. We expect ethane exports to reach 1 million bpd by 2022 and propane exports to increase to about 1.5 million bpd over the same time frame from a combined 1.1 million bpd of exports in 2017. Ethane export demand is being driven by China, India, and the United Kingdom, while propane export demand comes from Japan, Mexico, India, and China. We have concerns about long-term demand in Japan and Mexico, but Indian and Chinese demand for propane looks very healthy over the long run.

We expect NGL prices to decline given our bearish long-term oil outlook ($60/bbl Brent), as most NGLs have to remain competitive on pricing with oil-derived feedstocks such as naphtha and Saudi Arabian propane. For the most part, NGL prices have been highly correlated with Brent prices. We expect ethane pricing, which has proved to be less correlated with oil prices, will be flattish with current prices over the next few years due to higher demand from China, India, and Europe, since it represents an attractive, more environmentally friendly and cheaper feedstock than propane, naphtha, or coal. On a composite barrel basis, the NGL barrel will become more weighted toward ethane over time.

For more details on our bearish call for long-term oil prices, please see our June report "Oil Prices Are Unsustainably High, Stretching Energy Valuations." For more details on our NGL forecast, please see our July report "The Natural Gas Liquids Rubik's Cube Solved."