Lower ethane and propane prices drop natural gas liquids prices
Lower ethane and propane prices drop NGLs prices
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 (or 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 sector.
Interested in CHK? Don't miss the next report.
Receive e-mail alerts for new research on CHK
NGLs are made up of different compounds
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 closed lower at $37.36 per barrel on July 11, compared to $38.16 per barrel for the week ending July 3.
During the week, ethane prices moved down to $0.27 per gallon from $0.29 per gallon, propane prices declined marginally from $1.04 to $1.03 per gallon, butane prices increased slightly from $1.21 per gallon to $1.22 per gallon, iso-butane prices marginally decreased from $1.32 per gallon to $1.31 per gallon, and natural gasoline prices dipped from $2.22 to $2.18 per gallon. With NGL prices mostly down, the composite NGL barrel ultimately traded down ~2% on the week.
The representative NGL barrel reached highs of up to ~$50 per barrel in early February, given the strength in propane prices due to a cold winter as well as natural gas prices that pushed ethane prices up. Since then, NGL prices have fallen so that the representative NGL barrel is around ~$37 per barrel now—driven primarily by lower propane and ethane prices. Propane is used as a fuel for home heating, and prices had received a boost due to cold weather. In the past few years, ethane prices have correlated to natural gas prices, which also received support from the cold winter.
NGL prices still remain up roughly 13% since lows in mid-2013. Through 3Q13 and 4Q13, NGL prices were helped by the rise in West Texas Intermediate (or WTI) crude prices, which shot up from ~$95 per barrel to $110 per barrel at points in the second half of 2013. NGLs prices usually correlate to movements in crude oil prices. However, propane has come off sharply in recent times, led by higher production. This has caused NGL prices to fall, although the effect of the decline was somewhat offset by ethane, which has remained flat.
NGLs have historically tracked movements in crude prices
Historically, NGLs prices have largely tracked crude oil prices. However, in recent years, the composite barrel as a percentage of crude prices has declined. This is because ethane and propane make up a large percentage of the average NGL barrel. However, these two commodities had experienced a surge in supply due to the shale boom and a decline in prices in relation to crude oil.
There’s still a correlation between NGL prices and crude, and movements in oil prices can cause NGL prices to move as well. The NGL barrel price relative to crude oil has gone down somewhat since the onset of summer.
This week saw NGL prices trade down—a negative short-term indicator, and prices remain down ~9% since January, 2014. 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–$60 per barrel through much of 2011 versus ~$37 per barrel now).
Major producers of NGLs include CHK, RRC, SM, and LINE—many of which are found in energy exchange-traded funds (or ETFs) such as the Vanguard Energy ETF (VDE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
To learn more about important releases that affect oil and natural gas investments, see Market Realist’s Energy and Power page.