Daily Blog

How big could the gap between crude and gas go?

Yesterday Feb. natgas was up 10.3 cents at $3.096/MMBtu.  Don’t get excited.  This is just a minor blip due to weather and a little bit of crude sympathy.  There is still a lot of gas out there.

As we enter 2012, rarely has the chasm between North America crude oil and natural gas markets been wider.  NYMEX front-month crude oil hit an 8 month high yesterday of $103.74/bbl before dropping back to settle at $103.22/MMbtu.  That’s a 33X gas-to-crude ratio.  Crude oil is being driven up by threats of an Iranian embargo by the EU, potential Iranian retaliation against the Strait of Hormuz, and general concern about political instability in the Middle East.  Natural gas in North America is still being driven primarily by oversupply, and is far removed from the risks influencing oil prices.

So how big could the gap between crude and gas go?  Is there any shred of correlation left between the products?  The short answer is no.  If something goes haywire with the Iranian situation, crude could easily bump up another $20-$40/bbl.  If this moderate winter continues, gas prices in the spring could drop below $2/MMbtu.  At $125 crude and $2 gas, the ratio calculates out at 62.5X, far above any historical precedent.   

If such a scenario happened, what are the implications?   Here are a few to think about.  Frac spreads go to the moon and gas processing is golden.  NGL supply growth escalates above its already rapid pace.  Drilling for dry gas is dead, while crude oil drilling becomes even more frantic.   Any fuel switching that has not already happened, happens.  And of course, $2 gas would replace a lot of coal in power plants.  These developments are readily apparent.  The real question is what could happen that is not so apparent.  That could be a big opportunity in 2012.