What is the Oil Price to Natural Gas Ratio
The oil price to natural gas ratio compares prices of crude oil and natural gas and is used as a measure of demand for each commodity. Energy analysts, traders and investors use the ratio when gauging the market of oil versus that of natural gas. In the oil price to natural gas ratio formula, the oil price is the numerator and the price of natural gas is the denominator.
BREAKING DOWN Oil Price to Natural Gas Ratio
Crude oil and natural gas are both energy commodities that trade on commodities markets and have a common use as fuels for heating. Traders refer to the price relationship as an inter-commodity spread, measured by comparing the per-barrel price of crude oil to 10 MMBtu’s of natural gas. Up until 2009, the oil price to natural gas averaged 10:1, meaning when oil was at $50 a barrel, natural gas would be at $5 per MMBtu. 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.
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, but 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.