Price Link between Crude Oil and Natural Gas Remains Broken

The oil-to-gas price ratio argument fell apart in early 2009 and has remained disconnected ever since. 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 down to 20:1. Today, the oil-to-gas price ratio remains “broken,” and is around 22:1 since the price of a barrel of crude oil is nearly 22 times the price of an MMBtu of natural gas.

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 other cases, 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.

As reported in the July 2011 Natural Gas Price Outlook published by Energy Solutions, Inc., President, Valerie Wood, provided an explanation to this shift. “There are no indicators that the oil-to-gas price ratio is likely to return to what it was prior to 2009, because natural gas production continues to flourish even at lower price levels as producers continue to develop natural gas resources as they work to take advantage of the economic benefits of NGLs.”

While the oil-to-gas price ratio is no longer consistent, it should be noted that crude oil and natural gas have had several coincidental price peaks: 1997, 2001, 2005-2006, and 2008. It also is important to recognize that natural gas has gone through periods of creating consolidating bottoms before it joined crude oil in a price advance. If any of this history repeats, natural gas could return to some very high price levels. It is hard to imagine this occurring given the current supply and demand balance for natural gas, but one also cannot ignore history because speculators and technical trading can be major price drivers even when fundamentals might indicate otherwise. 

Natural Gas Price Outlook provides you with the tools needed to implement a cost-effective natural gas strategy for the next 24-36 months. This 50-plus 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.  Click here to learn more and secure your copy. Substantial discounts apply if you order by July 31, 2011.

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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.