Crude Oil and Natural Gas Prices Out of Sync

In 2009, as crude oil prices climbed to over $80 per barrel, natural gas NYMEX prices fell to $4 per MMBtu, taking the oil-to-gas price ratio to 20:1.  Today, the oil-to-gas price ratio remains “broken,” and as of February 9, 2012, the oil-to-gas price ratio was 40:1, with the front-month natural gas NYMEX contract trading at around $2.50 per MMBtu, and the front-month crude oil NYMEX contract trading at around $99 per barrel, the price of a barrel of crude oil is nearly 40 times the price of an MMBtu of natural gas.

In the February 2012 Natural Gas Price Outlook, Valerie Wood, President of Energy Solutions, Inc., the organization that produces and publishes Natural Gas Price Outlook, stated that, “prior to 2009, the prices of crude oil and natural gas commodities moved in tandem.  Over time, analysts placed a value on what level natural gas prices should be at if crude oil prices were at a certain price point.  While the two commodities aren’t interchangeable, the energy content of natural gas to crude oil is around 5.6 to 1.0, or approximately 6:1, for ease of figuring.  This is referred to as the oil-to-gas price ratio, and this ratio became a way of measuring whether the value of either of these commodities was too high or too low.”

For example, at a 10:1 ratio, if the price of natural gas is $7 per MMBtu, then the price per barrel of crude oil was expected to be around $70 per barrel.  If the price per barrel of crude oil was in excess of $70 per barrel, it was presumed that either natural gas was undervalued, or crude oil was overvalued.  Conversely, if the price per barrel of crude oil was below $70, it was presumed that either natural gas was overvalued, or crude oil was undervalued.  This oil-to-gas price ratio moved up and down based on current events, but the average range was between 6:1 and 10:1.

Speculators looked to the historical oil-to-gas price ratio as a profit-making opportunity by trying to gauge which commodity was perceived as overvalued or undervalued.  In addition, the two commodities may have moved in tandem simply because some investors tended to buy multiple energy commodities, which may have included both crude oil and natural gas.

There are no indicators that the oil-to-gas price ratio is likely to return to what it was prior to 2009.  This is because natural gas production continues to flourish even at lower price levels because of associated gas produced in conjunction with crude oil and the economic benefits of NGLs.  he oil-to-gas price ratio argument fell apart in early 2009 and has remained disconnected ever since.

Natural Gas Price Outlook provides you with the tools needed to implement a cost-effective natural gas strategy for 2012 and beyond.  This 59-page, comprehensive analysis evaluates numerous price drivers and is a must-read for those who want answers to what the future holds for natural gas prices.  To learn more and secure your copy, visit http://www.naturalgasoutlook.com.

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About Energy Solutions, Inc.

Formed in 1996, Energy Solutions, Inc. is independently owned. With more than 50 years of experience in the natural gas industry, our team focuses on natural gas prices and in helping businesses improve their internal processes for the purchase of natural gas.