NGL Prices - Note from Raymond James - Oct 26

[dan_s]

Note received this morning from the Raymond James Energy Research Team in Houston on October 26:

In addition to the pandemic, NGL markets are uniquely captive to dynamics extending far outside their control – oil production economics, natural gas prices, gasoline demand, winter weather, etc. – turning 2020 into quite the roller coaster. Despite the volatility and extremely high inventories, we think U.S. NGLs have a pretty similar set up to that of U.S. natural gas, meaning prices are poised to move higher in 2021.

Today’s Stat addresses: 1) how our U.S. NGL supply and demand forecasts have changed throughout this year; 2) what’s happening with current all-time high U.S. NGL inventory levels; 3) our latest forecast for U.S. NGL prices for 2021; and 4) what our bullish outlook means for the stocks. < Bullish for RRC, EQT, OVV and XEC. GDP and CRK are primarily dry gas companies.

Looking forward, the obvious statement for most equities and commodities right now is how the pandemic progresses through the winter is crucial to the near-term demand picture. That said, relative to crude oil, for example, overall NGL demand remains relatively "sticky." At the same time, supply expectations generally keep falling. This is partly because NGLs have a uniquely captive market, with the most variable factor being the U.S crude-oil driven supply-push. Additionally, our recent call for higher natural gas prices should set a more favorable floor for ethane prices.

With currently "chock-a-block" full U.S. NGL storage, we don't think much other than extreme weather will sway NGL prices much off of the winter 2020-21 strip. We should then see strength in 2021 as supply/demand mismatches widen but likely won't see prices up near more normalized levels of ~$0.60/gal until 4Q20. Still, our NGL price assumptions are ~50% higher than six months ago (and even those forecasts were above strip at the time). In short, very similar to our bullish call on U.S. natural gas prices, we continue to believe the U.S. NGL supply declines in 2021+ are under-appreciated by the market.
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The production mix (oil, dry gas and NGLs) for all upstream companies in our three model portfolios is shown at the bottom of each company's forecast/valuation model, which you can find on the EPG website.