Oil prices and the natural gas liquids markets

Abstract

This paper investigates the impact of oil market structural shocks on the prices of natural gas liquids (NGLs), including ethane, propane, normal butane, isobutane, and natural gasoline, over the period from January 1985 to April 2020. To identify the structural demand and supply shocks in the crude oil market, we use a vector autoregression model and assume that the innovations to the real price of crude oil are predetermined with respect to the local NGLs markets. Our results show that, in the long run, more than 55% of the variation in the real price of NGLs is explained by the structural shocks in the global crude oil market. We also find that, unlike oil supply shocks, demand-side shocks have permanent and persistent impacts on NGLs’ real prices and should be of main concern to investors aiming to develop gas wells and NGLs producing technologies.