20 Year History: Price of Natural Gas to West Texas Crude Oil

Note that for most of the past 20 years, natural gas did not fall below 10% of the price of crude oil. Now it is only 2% of the price of crude (80% below its most common low).

The cost of finding and extracting natural gas, plus the cost of financing and the other costs of operating a production company are well above the current price – perhaps, by some estimates, in the $5-$6 range. Exploration companies can’t operate long-term as gas prices below cost. That’s why the number of drilling rigs is declining at this time, and companies are attempting to divert exploration to oil.

The cost of finding and extracting oil from deep ocean wells exceeds $70. If a low ratio of the price of gas is 10% of that of crude, and if the world replacement cost of oil (assumed to be mostly from deep ocean) is about $70 or more, then $7 natural gas seems reasonable.

In this chart, top panel is the 20-year monthly price ratio of NatGas/Crude. The middle panel is the price of NatGas. The bottom panel is the price of West Texas Intermediate Crude. In all three panels the moving average is for 36 months.


Addendum (April 8, 2012) — Data from today’s New York Times

The U.S. glut of natural gas is 2.5 Trillion cubic feet.  The usual end of winter gas in storage is 1.5 Trillion cubic feet.  The maximum storage capacity (above and below ground) in the US. 4.4 Trillion cubic feet (about a 2 month supply at normal usage rates).  At the current rate of production and consumption, the maximum storage capacity would be reached, at which time the price of gas could fall dramatically below the near $2 per 1000 cubic feet price.

This past winter was the 4th warmest in 117 years, and this past March was the warmest since 1950.  Warm weather reduced natural gas demand for heating.

The drilling rig count has decline 30% from the peak to 658, as driller divert to oil, which is not in oversupply.

Current production of natural gas in the U.S. is about 63 Billion cubic feet per day.

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