What Is the Oil Price to Natural Gas Ratio?
Let me explain the oil price to natural gas ratio directly: it's exactly what it sounds like—a ratio where the price of oil is the numerator and the price of natural gas is the denominator.
You should know that this ratio captures the relative valuation of these two key energy commodities. I see it used widely by commodities traders, energy analysts, and investors.
Key Takeaways
- The oil price to natural gas ratio expresses the price of oil relative to natural gas.
- It is a widely-used metric in the energy commodities market.
- The ratio has varied widely in recent years, reaching a historically low level in April 2020 during the 2020 crisis.
Understanding the Oil Price to Natural Gas Ratio
Crude oil and natural gas are essential energy commodities traded actively on markets like the New York Mercantile Exchange (NYMEX). They serve as fuels for heating and electricity generation worldwide.
One NYMEX crude oil contract equals 1,000 barrels of crude oil, while one natural gas contract equals 10,000 British Thermal Units (MMBtu) of natural gas. When you calculate the oil price to natural gas ratio, the oil numerator is in barrels, and the natural gas denominator is in units of 10 MMBtu. The higher this ratio, the greater the price of oil relative to natural gas. If the ratio declines, the difference in prices between the two commodities is narrowing.
Traders often buy crude oil futures when the ratio is below historical averages, figuring they're getting oil at a bargain. Similarly, they buy natural gas futures when the ratio exceeds the norm. You can apply this strategy in reverse too—selling oil futures when the ratio is high and natural gas futures when it's low.
Real-World Example of the Oil Price to Natural Gas Ratio
The oil price to natural gas ratio has displayed significant volatility in recent years. Until 2009, it averaged about 10:1, so if oil was at $50 a barrel, natural gas would be at $5 per MMBtu. In April 2012, however, the ratio surged to 50:1, with oil at $120 per barrel and natural gas at just $2 per MMBtu. A few years later, from June 2014 to March 2015, oil prices fell to $45 per barrel, dropping the ratio to 16:1.
The most dramatic shift came in April 2020, when oil prices hit historic lows due to the global crisis. Crude oil reached $15 per barrel, natural gas was at $1.91 per MMBtu, resulting in a ratio of 8:1.
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