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Natural gas liquids prices continue to creep up with support from oil’s rally

2013.07.16 - NGL STEnlarge GraphNatural gas liquids (NGLs) are another component of upstream energy production

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 producing and selling NGLs—especially those 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.

NGL prices rose on the week

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. Using this representative composite barrel, NGL prices were up, closing at $34.45 per barrel on July 5 compared to $35.77 per barrel for the week ended July 12, which 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 have historically tracked movements in crude prices, but prices have fallen relative to crude lately

Natural gas liquids prices have largely tracked crude oil prices historically. However, 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 because of turmoil in the Middle East in addition to large inventory draws. This was likely the cause behind higher NGL prices on the week. For more on these factors, please see Why Middle East and North Africa turmoil could cause an oil price spike and Must-know: Oil prices rise to new highs on supportive inventory report.

2013.07.16 - crude vs nglEnlarge Graph

NGL prices increased this week

This week saw NGL prices trade up, which is a positive in the short term. From a medium-to-long-term perspective, many producers still find current price levels economic enough to continue to target and drill for NGLs, but they have suffered from the price drop. Major producers of NGLs include CHK, RRC, SM, and LINE—many of which are found in the Vanguard Energy ETF (VDE).

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