In less than a month, the crude-to-gas ratio did a complete U-turn, flying up from 22X in mid-January to 42X on Friday, the highest ratio since May 2012. This ratio is simply the price of WTI crude oil divided by the price of Henry Hub natural gas. It is an indicator of the strength of crude prices relative to gas, with a high ratio usually supportive of high petrochemical steam cracker margins and gas processing frac spreads.
Over the past ten years, the average ratio has been 22X, but in 2023 the ratio soared to average 30X, reaching an astronomical 40X in April. After that peak, the ratio declined, dropping to only 22X on January 12 (red dashed oval), the lowest level in 365 days and equal to the ten-year average ratio. At the time we called it mean reversion. But that ratio did not last long, as crude oil prices stayed relatively firm due to OPEC+ cuts and Middle East turmoil. Meanwhile, natural gas cratered due to high production and (except for the short January deep freeze) relatively warm weather. Consequently, the ratio soared to 42X on Friday (green dashed oval). Will it go higher? It is a possibility, as natural gas gets ready for incredibly bearish conditions this spring – high production with no incremental LNG exports.
