Natural Gas Daily
Producers face hurdles in NGL hedging strategy

Friday, March 23, 2012

Some producers are having difficulty hedging their rapidly expanding natural gas liquids production, as currently available financial products lack sufficient liquidity or product correlation.

Ben MacFarlane, an analyst with Platts unit Bentek Energy, said that "since NGL prices never correlated perfectly with crude, the hedge is always dirty, but normally they correlate well enough for the hedge to be effective. Ethane is more difficult to hedge since its correlation with crude is the weakest."

As an alternative to hedging through oil, other producers use physically delivered NGL futures contracts. For instance, in July 2009, CME Group launched trading and clearing services for certain NGL contracts, including Mont Belvieu physical Louis Dreyfus Hub propane, Mont Belvieu physical non-LDH propane, Mont Belvieu physical normal butane, Mont Belvieu physical natural gasoline, Mont Belvieu physical iso-butane and Mont Belvieu physical ethane.

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