What Is the Oil Price to Natural Gas Ratio?

The oil price to natural gas ratio compares the prices of crude oil and natural gas. It is used as a measure of demand for each commodity. Energy analysts, traders, and investors use this ratio when gauging the market of oil versus that of the natural gas market. In the oil price to natural gas ratio formula, the oil price is the numerator and the price of natural gas is the denominator.

Key Takeaways

  • The oil price to natural gas ratio compares the prices of crude oil and natural gas. It is used as a measure of demand for each commodity.
  • Energy analysts, traders, and investors use this ratio when gauging the market of oil versus that of the natural gas market.
  • In the oil price to natural gas ratio formula, the oil price is the numerator and the price of natural gas is the denominator.

Understanding the Oil Price to Natural Gas Ratio

Crude oil and natural gas are both energy commodities that trade on commodities markets. The physical commodities have a common use as fuels for heating. Traders refer to the price relationship as an inter-commodity spread, and the ratio translates to 10 MMBtu (one million British Thermal Units) of natural gas per one barrel of oil. 

The higher the oil price to natural gas ratio, the greater the demand for oil. If the ratio declines, then the difference in the prices of the two commodities is narrowing.

Up until 2009, the oil price to natural gas averaged 10:1, meaning that when oil was at $50 a barrel, natural gas would be at $5 per MMBtu. In April 2012, the price of crude oil was over $120 per barrel and the price of natural gas was around $2 per MMBtu. This meant that the ratio was around 50:1. A couple of years later, after a significant decline in natural gas prices, crude oil prices fell even more on a relative basis. Between June 2014 and March 2015, the price per barrel of crude oil dropped from $107 per barrel to $45 per barrel. At this point in 2015, the ratio was close to the 16:1. Then, in April 2020, the price of crude oil hit historic lows as a result of the Covid-19 pandemic. Oil consumption decreased rapidly as many governments around the world issued mandatory stay-at-home orders. At the height of the global pandemic caused by Covid-19, in April 2020, crude oil was priced at around $15 per barrel, while natural gas was priced around $1.91 per MMBtu. This meant the ratio was about 8:1.

Special Considerations

How Oil and Natural Gas Futures Trade

On the futures market, an NYMEX oil contract represents 1,000 barrels and a natural gas contract equals 10,000 MMBtu. However, the contract price is based on one barrel and one MMBtu of gas. In March 2012, as oil prices spiked, the ratio was more than 48:1. Large discoveries of natural gas reserves in U.S. shale regions have also altered the ratio, while drops in oil prices have returned the ratio to more normal ranges since 2015.

A typical trading strategy supported by the oil price to natural gas ratio is to purchase oil or futures when the ratio is below its historic average, and gas when the ratio is excessive compared to previous time periods.