The ratio between the spot prices of crude oil and natural gas has been generally increasing since January 2009, but it has climbed rapidly in recent months, according to data from the US Energy Information Administration (EIA). The crude oil-to-natural gas spot price ratio has implications for production and consumption.
|Crude oil to natural gas price ratio. Source: EIA. Click to enlarge.|
The ratio increased because of both increasing crude oil prices and decreasing natural gas prices.
The spot price for Brent crude oil has increased 19% in the last six months, from $103.90 per barrel on 3 October 2011 to $123.81 per barrel on 30 March 2012. Several factors underpin the increase in global crude oil benchmarks since the start of the year. Over the same period, the spot price for natural gas at the Henry Hub has decreased 45%, dropping from $3.57 per million British thermal units (MMBtu) to $1.98/MMBtu. Natural gas spot prices have been near 10-year lows as a result of warmer-than-normal temperatures, ample natural gas in storage, and growing production.
In terms of production implications, EIA said, a higher crude oil-to-natural gas ratio encourages drilling for oil in preference to natural gas and makes natural gas liquids developments relatively more attractive than the development of dry natural gas resources.
On the consumption side, the higher ratio also encourages end users to choose natural gas over products derived from crude oil, such as distillate and residual fuel oil, wherever substitution is feasible.