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Stat of the Day: Ratio Between Oil and Nat Gas Hits 18 Year High

CNBC has a little article on this ratio going back nearly 20 years. The ratio historically averages in the 6-8 range and anything outside that range suggests that one commodity has moved to much or the other is lagging. When ratio hits a 20 year high its something to take note of. Basically the use of oil is now so much more then natural gas that anybody possibly able to switch will whether using compressed natural gas in vehicles or such which in turn helps rebalance the price ratio.

It's important to note that the crossover of use is very limited. Natural Gas is a domestic fuel not widely transported beyond the borders of the US. Any pickup in demand will have to come from the US and the growth in compressed natural gas being delivered to the US has increased the worry that pressure will exist on prices. Oil on the other is a global product where the prices are determined by the demand in China and Europe and the US. Supply can also be more impacted by political issues in OPEC or Iran and fighting in Nigeria or Iraq.

So the supply and demand equation can be pretty different short term, but long term it still comes down to if demand in say China for fuel is picking up it'll eventually lead to world growth and demand in nat gas in the US. Or businesses will convert more and more to natural gas for fuel needs hence lowering the price of oil. Either way natural gas is probably the best bet now.

The article makes an interesting note on the companies likely to benefit from higher natural gas prices. More investigation would need to be done to understand whether their hedging positions would acutally help them or not. Considering that the stocks have already risen while nat gas is close to the lows for the year makes Stone Fox Capital favor the nat gas ETF (UNG). The producers like CHK or HK could actually be good shorts if the price doesn't recover. Right now we're bullish on the market so we're staying away from the short and just going long the UNG until prices correct.

  • The ratio of crude oil to natural gas futures prices on the New York Mercantile Exchange reached their highest level since mid-July 1991 during yesterday's trading session. Oil closed the pit session at $68.09 / bbl and Natural Gas closed at $3.731 / million BTU for a ratio of 18.25 to 1 between the commodities. So far this morning, both commodities are trading up with the ratio roughly the same.
  • Looking at data going back to early June 1990, the average ratio of crude oil to natural gas futures prices stands at 9.256
  • Earlier in the session yesterday, this ratio hit as high as 18.55
  • The last time this ratio crossed above 18.55 was in July 1991

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