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  • Roger S. Conrad

Hedging Exposure to Lower NGL Prices

By Peter Staas on Oct. 26, 2012

Oil and gas companies’ overzealous production of natural gas and NGLs has restored the fortunes of domestic chemical producers, an energy-intensive industry that relies on these commodities to generate power and as feedstock. Within this space, olefin producers have benefited the most from trends in the energy patch.

The two most prominent olefins, ethylene and propylene, serve as the basic building blocks for three-quarters of all chemicals, plastics and synthetic fibers. Petrochemical firms produce these commodity chemicals in cracking facilities, the majority of which are located on the Gulf Coast, that heat ethane and propane with steam.

Not only do shares of well-positioned US olefin producers stand to benefit from temporary declines in ethane prices and near-term investments in capacity expansions, but, more important, the group also enjoys a substantial cost advantage over peers with production facilities in Asia and Europe.

Whereas ethane and propane account for about 90 percent of the feedstock used at cracking facilities in the US, petrochemical plants in Western Europe generate more than 70 percent of their ethylene from naphtha, natural gasoline and other petroleum derivatives that hinge on the price of Brent crude oil.

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor