Oil Price to Natural Gas Ratio

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Oil Price to Natural Gas Ratio

What it is

The oil price to natural gas ratio measures the price of crude oil relative to natural gas. It is calculated as:
oil price per barrel ÷ natural gas price per MMBtu

Traders, energy analysts, and investors use the ratio to compare valuations between these two major energy commodities and to identify potential trading opportunities.

How it’s measured

  • NYMEX crude oil futures contract = 1,000 barrels.
  • NYMEX (Henry Hub) natural gas futures contract = 10,000 MMBtu.
  • The ratio typically uses the spot (or futures) price of oil per barrel and natural gas per MMBtu.

A higher ratio means oil is relatively expensive compared with natural gas; a lower ratio means the price gap has narrowed.

Interpretation and common strategies

  • Mean-reversion approach: Traders often buy oil when the ratio is below its historical average (expecting oil to outperform) and buy natural gas when the ratio is above its historical average.
  • The strategy can be applied in reverse: sell oil when the ratio is high and sell natural gas when it is low.
  • The ratio is a relative-value metric, not a directional forecast by itself; fundamental factors (supply, demand, weather, geopolitics, storage) still drive individual commodity prices.

Historical context and examples

The ratio has shown wide swings over recent decades:
– Pre-2009 average: about 10:1 (for example, oil at $50/barrel, gas at ~$5/MMBtu).
– April 2012: roughly 50:1 (oil ≈ $120/barrel; gas ≈ $2/MMBtu).
– Mid‑2014 to early‑2015: around 16:1 (oil fell to ≈ $45/barrel).
– April 2020: fell to about 8:1 during the global crisis (oil ≈ $15/barrel; gas ≈ $1.91/MMBtu).

These swings reflect changing fundamentals, shifts in production patterns (e.g., shale gas and oil), and episodic market shocks.

Key takeaways

  • The oil-to-gas ratio is a simple relative-value metric: oil price per barrel divided by natural gas price per MMBtu.
  • It helps compare valuations and identify potential mean‑reversion trades but should be used alongside fundamentals and risk management.
  • The ratio is historically volatile and has ranged widely depending on market conditions.

Sources

  • MacroTrends: Crude Oil vs. Natural Gas historical price data.
  • CME Group: Crude Oil and Henry Hub Natural Gas futures contract specifications.