What is the ratio of the price of oil to natural gas
The oil to natural gas price ratio compares the prices of crude oil and natural gas and is used as a measure of demand for each product. Energy analysts, traders and investors use the ratio to assess the oil market relative to the natural gas market. In the formula for the ratio of the price of oil to natural gas, the price of oil is the numerator and the price of natural gas is the denominator.
BREAKDOWN Oil / natural gas price ratio
Crude oil and natural gas are both energy products that are traded in the commodity markets and have a common use as fuel for heating. Traders qualify the spread price relationship between commodities, measured by comparing the price of a barrel of crude oil to 10 MMBtu of natural gas. Until 2009, the price of natural gas oil averaged 10: 1, which means that when oil was $ 50 a barrel, natural gas would be $ 5 per MMBtu. The higher the price of oil / natural gas, the higher the demand for oil. If the ratio decreases, then the price difference of the two products decreases.
How Oil and Natural Gas Futures Trade
On the futures market, a NYMEX oil contract represents 1,000 barrels and a natural gas contract is equivalent to 10,000 MMBtu, but the contract price is based on one barrel and one MMBtu of gas. In March 2020, as oil prices soared, the ratio was above 48: 1. Large discoveries of natural gas reserves in shale regions of the United States also changed the ratio, while falling Oil prices have brought the ratio back to more normal levels since 2020.
A typical business strategy supported by the oil / natural gas price ratio is to buy oil or futures when the ratio is below its historical average, and gas when the ratio is excessive compared to previous periods.