The ratio between crude oil and natural gas (NYMEX) futures yesterday was 31.8. That is crude prices in $/Bbl were 31.8 X natural gas prices in $/MMbtu. In the 10 years from August 1997 to August 2007 the ratio averaged 7.5 X – that was the old world. Since August 2007 the ratio has averaged 19.4 X – with a dramatic rise during the last year to dizzying heights over 50 X. A major shift to high liquid hydrocarbon production has ensued. Now the futures market indicates the ratio will halve from 31 X to 15 X by 2020. Today we review the prospects for a return to a more normal crude to gas ratio.
As reported in previous blogs (see for example “The Golden Age of Natural Gas Processors – NGLs in a 50X Crude to Gas Ratio”) the crude to gas ratio is a measure of the relative value of hydrocarbons in a liquid form (e.g. crude oil) and hydrocarbons in a gaseous form (e.g. natural gas). There are two ways typically used to express the crude to gas ratio – the rule of thumb method that is simply crude price divided by natural gas price or the BTU ratio method that is gas price divided by (crude price /5.8) where 5.8 is the number of MMbtu in a barrel of crude. RBN Energy sticks to the rule of thumb method since it is more intuitive.
Conventional wisdom used to say that the crude-to-gas ratio should gravitate back to the 5.8 BTU ratio or its close approximation 6X (i.e. crude price = 6X gas price). Chart #1 below shows the data over the last 15 years since August 1997 using NYMEX WTI crude in $/Bbl and NYMEX natural gas in $/MMbtu with the ratio (green line) calculated as crude divided by gas. The ratio trundled along sleepily until about 2007 with an average over that first 10 years of 7.5 X – not too far above the 6X conventional wisdom level. Then, at the end of 2008 just after crude and natural gas prices had crashed in response to the financial crisis, the ratio began to climb. It reached around 20 X during 2009 through 2011 before skyrocketing in the past year.
Source: CME NYMEX Data from Morningstar
Chart #2 zooms in on the same data series over the past four years to show the dramatic ratio increase that took place. Since August 2007 the ratio has averaged 19.4 X – with a rise during the last year to dizzying heights over 50 X. Since April of this year the ratio has fallen back to its present level just over 30 X as natural gas prices have recovered from lows under $2/MMbtu and crude oil fell back under $100/Bbl.