As the calendar flipped to 2011, most natural gas liquid (NGL) frac-spread margins took a tumble, although isobutane and pentanes-plus (C5+) demand increased as refiners switched to winter-grade gasoline, which uses isobutane as a primary ingredient. The prices of C5+ products increased due to their relationship with rising crude oil.

Ethane margins lost October gains due to the market rebalancing and increased competition from propane as an ethylene feedstock. While frac-spread margins were down over this time frame, NGL prices actually gained strength, with the heavies showing the most strength from increased demand from refiners and tightened supplies.

Should NGL prices continue to trend at their current rates, frac-spread margins should strengthen throughout 2011, because forecasts for natural gas prices are largely negative. Raymond James & Associates cut its 2011 gas-price forecast, dropping from $4.25 per thousand cubic feet (Mcf) to $3.75, mainly due to strong supply growth.

Conversely, FBR Capital Markets forecasts a strong gas market in second-half 2011 and has raised its pricing outlook from $4.50/Mcf to $5.50. It notes that current operating margins are insufficient to incent the required level of shale-gas investment needed to balance the market beyond 2011. According to FBR, gas-supply growth in the first half of 2011 will be driven by such noneconomic issues as held-by-production drilling and completion of wells previously drilled.