The ratio of NGL-to-crude oil prices looks like it will be rebounding, and over the next two or three years could rise to levels not seen since the Shale Revolution brought down NGL prices at the end of 2012, a signal that all of the new NGL-consuming petrochemical cracker projects now under construction may not be as lucrative as their developers had once hoped. Several factors are driving the ratio’s rise: increasing U.S. demand for NGLs; more exports; stubbornly low crude oil prices and a lower trajectory of NGL production growth. Today, we examine the historical relationship between NGL and crude oil prices and the reasons why that ratio may be headed back above 50%.
The Shale Revolution has had many market effects –– it’s made fortunes, transformed regions like the Marcellus/Utica and Bakken into energy and economic powerhouses, and given the U.S. a degree of energy independence that few would have predicted a decade ago. It’s also wreaked havoc on what for years had been reliably consistent relationships or ratios between different types of hydrocarbons. The NGL-to-crude ratio is a case in point. First, an explanation. As we at RBN define the measure, the NGL-to-crude ratio is a weighted average of OPIS/Mont Belvieu natural gas liquids (NGLs) prices divided by CME/NYMEX front month crude oil futures. The weighted average for the NGL mix that we use to calculate the ratio is 42% ethane, 28% propane, 11% normal butane, 6% isobutane, and 13% natural gasoline.
Figure 1 below shows the history of this ratio. For many years the ratio averaged about 60% (green line), staying within a 50% to 70% range most of the time. But as we covered last week in These are a Few of My Favorite Rigs, rapidly growing natural gas production and increasingly oversupplied market conditions brought natural gas prices down in the early days of the Shale Revolution, which gave producers the incentive to shift their attention and resources toward “wet” gas shale areas that produced significant volumes of NGLs. Then the same thing happened to NGLs that had happened to gas a few years earlier: NGL supply growth crushed NGL prices, which resulted in a steep decline in the NGL-to-crude ratio. Since 2012 the ratio has averaged just over 40% (red line, Figure 1), and in 2015 it was only 38%.