Why last week was bullish for oil and natural gas commodities

Part 3

Why natural gas liquids prices have trended up for 7 months

Natural gas liquids (or 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.

2014.01.28 - NGL STEnlarge Graph 

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 9% on the week, closing at $48.20 per barrel on January 24 compared to $44.26 per barrel for the week ended January 17. During the week, ethane traded up 30% and propane traded up 11%.

Note that ethane in recent months has started to trade more closely to natural gas. Meanwhile, other components of the NGL barrel, like butane and pentane, remain more closely linked to movements in crude oil prices, which traded down on the week. Natural gas advanced 20% last week, which could have driven up ethane prices. Plus, one major use of propane is as a heating fuel. Recent cold weather is likely one driver of the spike in propane prices (see Why this winter has been positive for propane distributor MLPs).

2014.01.28 - NGL LTEnlarge Graph

The representative NGL barrel is up nearly 50% since lows in June, a medium-term positive catalyst. Natural gas liquids prices were helped by strength in WTI crude prices, which shot up from ~$95 per barrel to levels of up to $110 per barrel at points, as NGLs and crude correlate. Since then, though, crude prices have retreated somewhat, to ~$97 per barrel currently. However, NGL prices have remained relatively robust. One factor in this trend is that the composite NGL barrel has been helped by an increase in propane prices, which has likely been driven by higher propane exports. For more analysis, see How soaring propane exports affect prices.

Background: NGLs have historically tracked movements in crude prices

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.

 

2013.12.15-Crude-vs-NGLEnlarge Graph

There’s still a correlation between NGL prices and crude, and movements in oil prices can cause NGL prices to move as well. Plus, the NGL barrel price relative to crude oil has recovered somewhat since June of this year, as we’ve seen.

This week saw NGL prices trade up, a positive short-term indicator. Plus, note that NGL prices are up significantly since late June—a positive medium-term indicator. 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 ~$48 per barrel now). Major producers of NGLs include CHK, RRC, SM, and LINE—many of which are found in energy ETFs such as the Vanguard Energy ETF (VDE) and the SPDR S&P Oil & Gas Exploration & Production ETF.

To see why inventories for both oil and natural gas were also bullish last week, see this Market Realist series.

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