Global Outlook

Oil Versus Natural Gas

Contributed by eResearch

By Bob Weir

It has been almost four months, just after the BP blow-out, since we last looked at our graph that tracks the price of crude oil versus that of natural gas. We started our weekly tracking in May 2007 and, since then, the average ratio over this time has been, oil:gas, 14.48:1. Since the March 2009 market lows, the average ratio has been 17.94:1. The ratio currently (August 20, 2010) is 17.53:1.

The average price of oil since May 2007 is US$80.73/bbl and, since March 2009, it is US$71.50/bbl. The figures for natural gas are US$6.06/mmcf and US$4.12/mmcf. Current prices are US$73.46/bbl and US$4.19/mmcf.

The harsh winter of 2009/2010 caused above-average gas consumption (55% of U.S. homes use natural gas for heating), with storage levels returning to normal just before the onslaught of the hot summer months, which likely reduced them again. The outlook for natural gas is now dependent upon a pick-up in industrial demand and the severity of the coming winter. The rest of the hurricane season remains the wild card (i.e., it could knock out some production, which would send prices higher).

As we enter the fall months, natural gas usage may slow, but stocks will be looking ahead. Any evidence of an improvement in industrial consumption could react positively on natural gas prices and give natural gas stocks a lift. Bob Weir, CFA, Managing Director, Research Services August 23, 2010.