To many sports fans there are certain “cursed” sports franchises like the Chicago Cubs and the Cleveland Browns that seem to snatch defeat from the jaws of victory. Then there are franchises that are historically successful, but have fallen on hard times and can’t seem to catch a break to reverse that fortune such as Liverpool Football Club.

This storied club was the most successful in English football (né, soccer to all of us Americans), but has not won a domestic league title since 1990. To make matters worse, in those 24 years the club has seen its bitter rival, Manchester United Football Club, win 13 titles and usurp their throne as the most successful in the land.

For such a successful club it is somewhat surprising that one of the theme songs that its fans sing is the Gerry & The Pacemakers’ version of Rodgers & Hammerstein’s, “You’ll Never Walk Alone.” This song implores the listener to brave through challenging times in order to come out stronger.

When you walk through a storm, hold your head up high
And don’t be afraid of the dark
At the end of the storm, there’s a golden sky
And the sweet, silver song of a lark

The story of Liverpool F.C. and the advice in that song are a message that seem to parallel that of the U.S. ethane market. Ethane has traditionally been the feedstock of choice to crack ethylene. However, the NGL has found itself battling constant headwinds for much of the past three years that have kept it from duplicating its lofty past levels. As 2015 begins the NGL has fallen behind propane and butane as the most preferred feedstock for ethylene, whose very name indicates how close a relationship it has traditionally had with ethane.

In 2014, ethane was held back by diminished cracking capacity as many crackers were in the midst of expansion or undergoing maintenance. This resulted in an oversupply situation as demand was not able to keep up with supply. By the end of the year, cracking capacity reached its highest level, but the downturn in crude prices hasn’t led to the faster turnaround forecast earlier in the year.

Morgan Stanley Research expects West Texas Intermediate prices to average $58 per barrel (bbl) and Brent prices to be $65/bbl in 2015 as the current downturn is largely supply-driven and not a reflection of a widespread downturn in demand. “While many moving parts still need to settle out in terms of where 2015 consensus estimates land, lower oil price levels will clearly have a negative impact on U.S. petrochemical prices and margins, U.S. NGL prices, U.S. E&P earnings and—selectively and more moderately—U.S. midstream names in 2015,” the firm said in a Jan. 6 research note.

While 2015 will still present challenges to the ethane industry, the positive is that cracking capacity is at a high and the domestic petrochemical industry is growing in order to take advantage of the cheap and plentiful supplies of ethane.

The U.S. ethane advantage should continue through 2017 as it will be extremely difficult for naphtha to reach parity with ethane as naphtha co-product credits with Brent need to break down or U.S. natural gas prices need to improve to the high single digits, according to Morgan Stanley.

On a short-term basis ethane will remain oversupplied, but balances will even out and likely make a turnaround in the 2017 to 2019 period due to decreased crude production. “U.S. oil production creates [about] 60% of existing ethane supply. With U.S. ethane demand expected to grow by [about] 47% in 2017 to ’19, both existing supply and further supply growth will be key to ethane’s overall supply and demand balance,” the report said. It will take a few quarters for production to effectively decrease, which Morgan Stanley said means that the key period for ethane supply and demand will be 2017 to 2018. Crackers should still have enough ethane supplies to operate well as crude prices should be high enough to encourage further production.

Post-2017, $90/bbl prices are needed to encourage the development of six new ethane crackers along the Gulf Coast. These new facilities will each require about 90,000 bbl/d, or a total of 630,000 bbl/d, of incremental ethane. “With oil at $70 to $75/bbl, we anticipate 57% of new ethane supply … to come from oil-based shale plays (Eagle Ford, Bakken, Permian, Niobrara and the Rockies) and 43% of this increase coming from gas-based shale plays (Marcellus, Utica, Mississippi Lime and Barnett Combo),” the report said.

Changes in oil prices going forward will also impact the ethane supply-and-demand picture in 2020 in the following ways:

  • Prices of $95 to $100/bbl would encourage an increase in production to the point where ethane would be oversupplied by 175,000 bbl/d;
  • Prices of $80 to $85/bbl would have supply-and-demand in a delicate balance;
  • Prices of $70 to $75/bbl would have the market undersupplied by 200,000 bbl/d;
  • Prices of $60 to $64/bbl would leave the market undersupplied by 320,000 bbl/d; and,
  • Prices of $50 to $55/bbl would leave the market undersupplied by 630,000 bbl/d.

Supply-and-demand logistics will play a major role in whether companies choose to invest in these crackers or not as greater margins will help to pay off the projects sooner. For example, Morgan Stanley stated that ethylene margins of 40 cents per pound (lb) would generate more than $1.2 billion in annual EBITDA on a 1.5 million ton cracker. This would allow the project to be paid off in less than four years. However, if ethylene margins were 10 cents/lb, the annual EBITDA would be $320 million and result in a payback of about 15 years. Though still attractive, the report anticipates new cracker builds to slow in lower IRR scenarios.

Ethane may still have some challenges to overcome, but once they are it is likely that the domestic market will be much stronger for it with improved supply-and-demand functionality that will ensure success for years to come.