Oil and Gas Prices Live Separate Lives
Oil and Natural Gas prices used to much more closely related, and react in similar way. As of late, that is not the case. Not even close! Why has this happened? How different are they really? Donald Marron explains more.
In 2010, I wrote a series of posts documenting how oil and natural prices had decoupled from each other (see here and here). For many years, oil prices (as measured in $ per barrel) were typically 6 to 12 times natural gas prices (as measured in $ per MMBtu). That ratio blew out to around 20 in 2009 and again in 2010, a severe break with historical trends.
A barrel of oil has roughly 6 times the energy content of a MMBtu of natural gas. If the fuels were perfect substitutes, oil prices would thus tend to be about 6 times natural gas prices. In practice, however, the ease of using oil for making gasoline means that oil is more valuable. So oil has usually traded higher.
But the current ratio is unprecedented. Each Btu of oil is now worth about five times as much as each Btu of natural gas. Thanks to a torrent of new supply, natural gas prices are down at $3.00 per MMBtu even as oil (as measured by the WTI price) has risen back above the $100 per barrel mark.
If natural gas begins to play a more prominent and needed role within out energy needs, it may catch back up to oil and have similar situations again. However, if we continue on the path we currently are, they may only continue to seperate further.
Quotes taken from report by Donald Marron, Read the entire article here.
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