In this article, we will address a comparison between crude oil and natural gas and explain the relationship between their prices. We will also discuss competing energy products and present final conclusions.
Crude Oil and Natural Gas
Crude oil and natural gas are energy products. We use these fuels for heating and cooling our homes and meeting our other energy needs. The relationship between crude oil and natural gas prices is a reciprocal one, meaning that the prices of both change in tandem.
How is Crude Oil Linked to Natural Gas?
Many companies that produce crude oil also produce natural gas. The discovery and production of natural gas are closely tied to oil drilling operations. This is due to the fact that natural gas can be released and recovered during the oil drilling process.
It is noteworthy that the prices of oil and gas have a long-term relationship as related energy products. The relationship between crude oil and natural gas changed at the beginning of the 21st century due to the discovery of more natural gas reserves in the United States.
The discovery of large natural gas reserves in the Marcellus and Utica regions of the United States has altered the relationship between crude oil and natural gas. The price of natural gas in the United States decreased, while the price of oil continued to rise between 2000 and 2014.
With the slowdown in growth of emerging economies and a decline in oil demand, the price of crude oil fell significantly from late 2014 to early 2016. Crude oil prices hit historic lows due to the emergence of the coronavirus in 2020 and the near halt of oil demand. The price of natural gas fell slightly but stabilized well. As the price of crude oil rose again to over $92 per barrel in early 2022, the price of natural gas also increased, but not to the same extent as crude oil.
The Average Price Relationship Between Natural Gas and Crude Oil
Until 2009, the average price relationship between natural gas and crude oil was about 10 to 1. Oil is traded in barrels, while natural gas is traded in thousands of British thermal units (BTU) or MMBtu. This ratio translates to 10 MMBtu of natural gas for every one barrel of oil. For example, if the ratio remained at 10 to 1, and the price of crude oil was $40 per barrel, the price of natural gas would be around $4 per MMBtu.
The price relationship between gas and oil rose to over 50 to 1 in March and April 2012. At that time, the price of crude oil was over $120 per barrel, while the price of natural gas was around $2 per MMBtu.
The return to normal conditions began before 2009 in 2012 when natural gas prices started to rise. In 2014, when natural gas prices began to decrease, crude oil prices fell more on a relative basis. The crude oil bear market, which caused prices to drop from over $107 per barrel in June 2014 to below $45 in March 2015, resulted in the price differential narrowing to around 16 to 1.
By April 2020, crude oil prices reached new lows due to the COVID-19 pandemic. Government stay-at-home orders sharply reduced the need for oil. By the end of April 2020, the price of crude oil was around $17 per barrel, while the price of gas was approximately $1.81 per MMBtu, making the differential around 9 to 1.
It is noteworthy that in the futures market, crude oil contracts on the New York Mercantile Exchange (NYMEX) equal 1,000 barrels. Each natural gas contract on the NYMEX equals 10,000 MMBtu, but the prices quoted for each in the futures market represent the price per barrel of crude oil and one MMBtu of natural gas.
The Relationship
Price Relationships in Competing Energy Products
Understanding the price relationship between two competing products that vie for the same uses can give you insights into how future prices may unfold. When one product becomes more expensive than the other, there is often a reason behind it. In the case of oil versus natural gas, supply and demand are typically the factors driving the change.
The confirmed and potential reserves of natural gas have led to a significant decrease in prices. This results in widening the gap between producers more than usual. Returning to normal conditions in the gaps between producers can also be a result of people using one product over the other.
People will avoid the more expensive product in favor of the cheaper one. If oil prices rise, the demand for natural gas will increase. This will cause oil prices to drop and natural gas prices to rise until the market stabilizes again.
Conclusion
Changes in supply and demand lead to alterations in price gaps. Monitoring how these prices interrelate can help you understand price dynamics. The gaps between competing products, such as crude oil and natural gas, can be vital assets to be added to the toolkit of investments in commodities. They are another variable in the equations of investment science.
Sources:
Macrotrends. “Crude Oil vs Natural Gas – 10 Year Daily Chart.” Accessed Sept. 3, 2021.
U.S. Energy Information Administration. “Price Ratio of Crude Oil to Natural Gas Continues to Increase.” Accessed Sept. 3, 2021.
Macrotrends. “Crude Oil Prices – 70 Year Historical Chart.” Accessed Sept. 3, 2021.
U.S. Energy Information Administration. “What Are the Major Factors Affecting Natural Gas Prices?” Accessed Sept. 3, 2021.
Source: https://www.thebalancemoney.com/crude-oil-versus-natural-gas-competing-energy-markets-808876
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