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Why natural gas liquids prices increased on higher propane prices

Ingrid Pan, CFA

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.

(Read more: Crack Spread 101 (Part 1: What’s a crack spread?))

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 $36.95 per barrel on August 9 compared to $36.63 per barrel for the week ended August 2, 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 had largely declined, resulting in a medium-term negative indicator as well. Over the past several weeks, NGL prices had recovered somewhat, as WTI crude oil prices have shot to levels above $105 per barrel.

(Read more: Crack Spread 101 (Part 2: Factors that affect crack spreads))

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. Though oil prices decreased last week, as did most NGL prices, propane prices increased enough to cause the entire NGL composite barrel to increase. Propane prices may have increased due to distinctive supply and demand dynamics for that particular NGL. Much of propane demand is driven by residential and commercial usage (such as heating in winter months and grilling in summer months) and petrochemical usage (turning propane into propylene and then into end products such as plastic).


Last week saw NGL prices trade up, which is 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’ve suffered from NGL prices coming off highs. Major producers of NGLs include CHK, RRC, SM, and LINE—many of which are found in the Vanguard Energy ETF (VDE).

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

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