Oil Price to Natural Gas Ratio

What Is the Oil Price to Natural Gas Ratio?

As its name recommends, the oil price to natural gas ratio is a ratio in which the price of oil is the numerator and the price of natural gas is the denominator.

The purpose of the oil price to natural gas ratio is to capture the relative valuation of these two important energy commodities. It is widely utilized by commodities traders, energy analysts, and investors.

Understanding the Oil Price to Natural Gas Ratio

Crude oil and natural gas are important energy commodities that are actively traded on commodities markets like the New York Mercantile Exchange (NYMEX). They are widely utilized as fuels for heating and power generation all through the world.

One NYMEX crude oil contract is equivalent to 1,000 barrels of crude oil, though one natural gas contract equals 10,000 British Thermal Units (MMBtu) of natural gas. While working out the oil price to natural gas ratio, the oil numerator alludes to barrels of oil though the natural gas denominator alludes to units of 10 MMBtu. The higher the oil price to natural gas ratio, the greater the price of oil relative to natural gas. In the event that the ratio declines, this means the difference in the prices of the two commodities is restricting.

As a rule, traders will purchase crude oil futures when the oil price to natural gas ratio is below its historical midpoints, accepting that they are getting a bargain price for oil. Similarly, they will purchase natural gas futures when the ratio is over its historical standard. A similar strategy can likewise work in reverse, selling oil futures when the ratio is high and selling natural gas futures when the ratio is low.

True Example of the Oil Price to Natural Gas Ratio

The oil price to natural gas ratio has shown a fair amount of volatility in recent years. Up until 2009, for example, the ratio found the middle value of around 10:1, implying that when oil was at $50 a barrel, natural gas would be at $5 per MMBtu. In April 2012, nonetheless, the ratio leaped to 50:1, with oil at $120 per barrel and natural gas at just $2 per MMBtu. Just a couple of years after the fact, between June 2014 and March 2015, the price of oil dropped to $45 per barrel, bringing the ratio down to 16:1.

Be that as it may, maybe the most sensational recent event in the oil price to natural gas ratio happened in April 2020, when the price of oil hit historic lows because of the 2020 global crisis. During this period, crude oil came to $15 per barrel, while natural gas came to $1.91 per MMBtu, yielding a ratio of 8:1.

Highlights

• It is a widely-involved measurement in the energy commodities market.
• The ratio has differed widely in recent years, arriving at a historically low level in April 2020 during the 2020 crisis.
• The oil price to natural gas ratio communicates the price of oil relative to natural gas.