For the first time since late September 2013, the ratio of crude oil to natural gas (CME/NYMEX) futures on Friday hit 30X. That means the price of crude oil in $/bbl was 30 times the price of natural gas in $/MMBtu. Such a wide disparity in the value of the liquid hydrocarbon versus the gaseous hydrocarbon has huge implications for where producers will be drilling, the proportion of associated and wet gas that will be produced, the outlook for NGL production, and a host of other energy market developments. The ratio has been moving higher for the past couple of years, and recently has been boosted by the combined impact of increased tension in the Middle East (higher oil prices) and a warm winter so far in many of the largest gas-burning population centers in the U.S (lower gas prices). But it’s pretty likely that the trend will be with us for the long term. So today, we’ll begin a series that looks at the implications of this price relationship.
Back in the early days of the Shale Revolution, we wrote a number of blogs on the crude-to-gas ratio. That price relationship was really driving a lot of what we were seeing in the market at the time. (See NGLs in a 50X Crude-to-Gas Ratio World from 2012 and Consequences of a Lower Crude-to-Gas Price Ratio from 2014.) Since then, the ratio has continued to bounce around, but it’s been a while since we’ve put it in the spotlight, so to begin we’ll review some of the history of this important price 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). Here, we are using the front-month futures contract price for CME/NYMEX crude oil at Cushing versus the natural gas price at Henry Hub. There are two ways typically used to express the crude-to-gas ratio: (a) the rule of thumb method, which is simply crude price divided by natural gas price; or (b) the Btu ratio method, which is gas price divided by (crude price/5.8), where 5.8 is the approximate number of MMBtu in a barrel of crude. RBN Energy sticks to the rule of thumb method since it is more intuitive.
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