Why higher oil prices support better natural gas liquids fundamentals
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Natural gas liquids, or NGLs, refer to a group of hydrocarbons (ethane, propane, butanes, and pentanes) that are often found alongside dry natural gas (methane). Many upstream companies (companies that produce crude oil and natural gas) earn a significant portion of their revenue from producing and selling NGLs—especially companies that have a significant amount of “rich gas” assets, or natural gas assets “rich” in liquids. Some of these companies include Range Resources (RRC), Chesapeake Energy (CHK), SM Energy (SM), and Linn Energy (LINE). Price fluctuations in NGLs can affect the ultimate revenue and earnings of upstream companies, so NGL prices are an important indicator to track in the energy space. According to a presentation by the Midstream Energy Group, the average NGL barrel composition in December 2011 was ~43% ethane, ~28% propane, ~7% normal butane, ~9% isobutane, and ~13% pentanes or heavier hydrocarbons.
The price of the average natural gas liquids barrel was up for the week ended July 8
Using this representative composite barrel, NGL prices were up, closing at $34.52 per barrel on July 8 compared to $33.32 per barrel for the week ended July 1. This is a positive short-term indicator for companies with NGL production. The representative NGL barrel traded as high as ~$39 per barrel in mid March, but since then, prices have largely declined, resulting in a medium-term negative indicator as well.
NGLs tend to track crude, and the spike in oil prices likely supported NGL prices last week
Natural gas liquids prices have largely tracked crude oil prices historically. Over recent years, the composite barrel as a percentage of crude price has declined. This is because ethane and propane make up a large percentage of the average NGL barrel, but these two commodities especially have experienced a surge in supply due to the shale boom and have experienced a decline in prices. However, there’s still a correlation between NGL prices and crude, and movements in oil prices can cause NGL prices to move as well. Recently, oil prices have spiked given turmoil in the Middle East, and this was likely the cause behind higher NGL prices on the week.
Outlook in the short and medium-to-long terms
This week saw NGL prices trade up, which is a positive in the short term. From a medium-to-long–term perspective, natural gas liquids prices have dropped off highs, which is negative. This affects producers of NGLs such as CHK, RRC, SM, and LINE, many of which are found in the Vanguard Energy ETF (VDE).