Why a crude oil rally has helped natural gas liquids prices
Natural gas liquids (NGLs) are another component of upstream energy production
Natural gas liquids, or NGLs, are 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) garner much of their revenue from 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.
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NGLs are made up of different compounds that receive different prices, and production streams are largely ethane and propane
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 $38.15 per barrel on August 16 compared to $36.95 per barrel for the week ended August 9, which is a positive short-term indicator for companies with NGL production.
The representative NGL barrel has rallied ~20% since late June, a medium-term positive catalyst. Natural gas liquids prices have largely been helped by strength in WTI crude prices. For more on crude price movements, see Crude buoyed by Middle East turmoil.
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.
This week saw NGL prices trade up, and NGL prices are up significantly since late June. These are positive short- and medium-term indicators. From a longer-term perspective, many producers still find current price levels economic enough to continue to target and drill for NGLs, but they’ve suffered from NGL prices coming off highs (~$50 to $60 per barrel through much of 2011 versus less than $40 per barrel now). Major producers of NGLs include CHK, RRC, SM, and LINE—many of which are in the Vanguard Energy ETF (VDE).