US crude-to-gas ratio touching historic 11-year highs

Platts

The US crude oil-to-gas price ratio is nearing historic 11-year highs, a Platts price analysis shows, leading several analysts to suggest producers will only be more incentivized to drill for liquids and oil.

This will, however, produce more associated natural gas in the process, which only means further downward pressure for US gas prices going forward, they added.

The NYMEX April contracts for crude and natural gas settled Wednesday at $97.28/barrel and $3.872/MMBtu, respectively, pegging the price ratio at 25-to-1, or 4.3-to-1, when normalized on an MMBtu basis.

The historic high for the spread is 27-to-1 on September 3, 2009, when the crude contract settled at $67.95/b, while the gas futures contract settled at $2.508/MMBtu. The lower gas price, and the resulting gaping spread, was more a function of a deluge of shale gas supplies coming to market amid a mild summer with no hurricanes, analysts said.

The greatest impact of the current spread, analysts said, would be to further goad shale producers to dive headlong into drilling for oil and liquids. Ironically, the associated gas that also will be pulled out of the ground will only drive NYMEX gas prices lower.

"We are in an environment where $100 crude oil is bearish for $4 natural gas," analyst Stephen Schork said.

"The US is the most disconnected market in the world," said Credit Suisse's Teri Viswanath. She also noted the UK's National Balancing Point, Europe's most liquid gas-trading point, is getting a good bump up because of the soaring price of the Brent crude contract and the more direct link between the two commodities, thanks to oil indexed gas prices.

Despite the continuing geopolitical tensions in the Middle East and the further upward pressure it could provide to the global crude complex, analysts were skeptical as to whether the US crude-to-gas ratio could widen.

Indeed, an analysis of the futures curves of both products' settlements Wednesday indicates the largest spread remains at the now-prompt April contract.

"There is no link any more between [US] crude and gas," Jefferies & Co.'s Subash Chandra said. "They are no longer substitutable fuels. Only weather-adjusted power demand growth is the key to recovery in gas."

--Samantha Santa Maria, samantha_santa_maria@platts.com