An unsung byproduct of oil and natural-gas production is getting more attention from hedge funds and investors as they seek new ways to bet on the U.S. shale boom.
Natural-gas liquids, which include ethane, propane, butane, isobutane and natural gasoline, are separated out from crude oil and natural gas. They are known as the fuels in propane grills and butane lighters and as feedstocks to make plastics and chemicals. Until recently, they attracted little investor consideration.
But that has begun to change amid a swift increase in both supply and demand. U.S. production of NGLs topped 3 million barrels a day this year. Production volume has grown 60% in the past decade to become on par with the amount of oil produced in Texas or Iraq. Petrochemical manufacturers world-wide are expanding to take advantage of the new supply.
Investors can act as middlemen between producers and consumers of NGLs, particularly as banks are backing away from commodities trading. They also are more easily able to make bets on prices as trading volumes grow. Many investors are using NGLs as a way to bet on the North American energy boom while sidestepping the pipeline bottlenecks and export restrictions that have held down most U.S. energy prices.
It helps that unlike oil and natural gas, NGLs can easily be exported overseas, where prices are higher. Connections to the global market make it less likely NGLs will meet the same fate as natural gas, which saw prices crash when production swamped U.S. demand. NGLs fetch an average of $9.94 a million British thermal units, more than double the price of natural gas.
5 Things to Know About NGLs
“Anyone you can think of in the energy space is there,” said Greg Bower, a broker at Blue Ocean Brokerage. “There’s new people in it all the time.”
Still, the drop in oil and natural-gas prices over the past few months has taken its toll, with the price of propane futures recently hitting a 14-month low on the New York Mercantile Exchange. Even so, that market has more than tripled in size since the start of May to a record $2.8 billion.
At least two new hedge funds are focused on trading NGLs, people familiar with the matter say. KC Alpha Fund I launched in January with $850,000 and a plan to focus on trading NGLs, along with other energy products, according to people familiar with the fund.
Norman MacDonald, portfolio manager at Invesco Ltd. , owns shares in oil-and-gas producers that generate a large amount of NGLs, including Range Resources Corp.
“I don’t think the market really truly appreciates just what [NGLs] can do” for oil-and-gas producers, added Mr. MacDonald, who manages the $1.4 billion Invesco Energy Fund.
NGL trading is still sparser and less transparent than in the vast markets for crude oil or natural gas. However, growing volumes are making it easier to get in and out of positions in the market, building NGLs’ appeal to large investors. Futures trading volumes in these markets rose 18% in the first six months of 2014 compared with the same period last year, according to Intercontinental Exchange Inc.
“You’re seeing global macro hedge funds step in,” said Sid Perkins, managing partner at Houston brokerage Ion Energy Group, which is owned by OTC Global Holdings. “They’ve been watching it for the last few years, and were waiting until the market got to a point where it was liquid enough for them to come in and trade.”
Another problem for traders is that NGL markets are typically not that volatile, so there are fewer opportunities to profit from price moves. Propane, the largest NGL market, saw prices spike in February as high demand from farmers, home-heating and overseas buyers all stretched supplies during a frigid winter. But stockpiles rebuilt rapidly this summer, reducing expectations for a similar squeeze this year.
The lack of transparency in the market is keeping OppenheimerFunds Inc. from trading NGLs, said George Zivic, portfolio manager for the $420 million Oppenheimer Commodity Strategy Total Return Fund.
“Unless you’re privy to what [producers and manufacturers] are doing on a month-to-month basis, you can really get squeezed,” Mr. Zivic said.
Others see potential for prices to rise, potentially drawing in more investors. Enterprise Products Partners LP plans to build a terminal by the third quarter of 2016 to export up to 240,000 barrels a day of ethane from the Gulf Coast. When Enterprise opened a propane export facility in 2013, trading volume expanded as traders prepared for greater access to overseas markets, said Michael Angell, markets editor for the Oil Price Information Service, which tracks spot NGL prices.
“I’m actually beginning to move some of my businesses more into the NGL side because of the demand,” said Steve Reese, chief executive of Reese Energy Consulting and Reese Energy Training in Edmond, Okla., who said he is planning to start a propane business. “The trading activity has definitely increased.”