In a recent report, Oppenheimer analysts gave their outlook for the energy sector in 2015. One of the major topics of discussion in the report was natural gas liquids (NGLs). Analysts gave their take on the situation moving forward and noted their top two NGL-related picks for investors.
NGL Mixed Barrel
Analysts note that the price of all NGL components dropped sharply in 4Q14, with the heavier components hit hardest. The prices of heavy NGL components such as butanes and natural gasoline are highly correlated with the price of crude oil because they can be substitute products in many cases. Lighter components (ethane and propane) are more highly correlated with the price of natural gas. Analyst see no relief to the current environment of extreme oversupply in the NGL market and predict that prices will remain under pressure for the time being.
Ethane
Current natural gas prices of around $2.90 per MMBtu suggest a price of only $0.19 per gallon for ethane. At these prices, extraction of ethane is not economical, as the extraction process costs more than $0.19 per gallon. Therefore, analysts believe that ethane rejection rates have peaked.
Propane
With propane inventories at five-year highs, the price dipped to $0.76 per gallon in 4Q14. These low prices leave razor-thin margins for the propane fractionation process.
Butane
Winter is historically a strong season for butane prices, as higher-octane winter blend gasoline contains a higher level of butane. However, butane prices couldn’t escape the downward pull of crude oil’s collapse this winter, and prices fell to below $1.00 per gallon.
Natural Gasoline
As the heaviest NGL component, natural gasoline has the highest correlation with crude oil. Therefore, it’s not surprising that natural gasoline prices suffered the sharpest fall in 4Q14.
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