Ratio

The ratio between crude oil and natural gas (NYMEX) futures yesterday was 27.7. That is crude prices in $/Bbl were 27.7 X natural gas prices in $/MMbtu. The ratio today is far higher than its historical norm of 7.5X before 2007.  It started to increase in 2008 and reached 54 X last year when gas prices crashed below $2/MMBtu. This year the ratio has averaged 27 X and has shown no clear trend up or down. The ratio is important because it underpins two of the key features of the shale boom to the US economy – cheap energy in the form of natural gas and higher prices for refined product and petrochemical exports. Today we attempt to discern the future direction of the ratio.

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.