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Natural gas liquids prices off peaks but up from mid-year lows

Ingrid Pan, CFA

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.

(Read more: Introduction [PART 1])


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 down slightly on the week, closing at $37.66 per barrel on September 27 compared to $38.08 per barrel for the week ended Septemer 20. Also NGL prices were down roughly 7% since the beginning of September. These represent negative short-term indicators for companies with significant NGL production.

Despite the recent downward movement, the representative NGL barrel remains up over 15% since lows in June, a medium-term positive catalyst. Natural gas liquids prices have largely been helped by strength in WTI crude prices, which shot to levels of up to $110 per barrel at points. Recently, crude oil prices have come down, which likely contributed to the decline in NGL prices, as the crude and natural gas liquids prices are correlated. For more on crude price movements, see Oil prices fell as concern shifted from Syria to the US shutdown.

Aside from elevated crude prices, the composite NGL barrel had also been helped by an increase in propane prices, which has likely been driven by higher propane exports. For more background, see Why natural gas liquids prices increased on higher propane prices.

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.

(Read more: Why ethane stopped trading like crude and started trading like nat gas (part II))


This week saw NGL prices trade down, a negative short-term indicator. However, 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 ~$35 to $40 per barrel now). Major producers of NGLs include CHK, RRC, SM, and LINE, many of which are found in the Vanguard Energy ETF (VDE).

(Read more: Natural gas continues to lose market share to coal year-over-year due to price gains)

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