This shows the ratio of crude oil (Cushing, OK WTI Spot Price FOB) to natural gas (U.S. Natural Gas Wellhead Price) over the years. I have also added recession bands.
Look at that long-term trend. It's as flat as the earth was once thought to be. For whatever reason, it seems to like 10.
March 4, 2010
The Price Link Between Crude Oil and Natural Gas Is Disappearing
Question: Will the crude oil to natural gas price ratio return to historical levels?
Conclusion: No, although at times the historical ratio will seem to apply, if only by coincidence.
It will never return to the historical level again. You heard it here first folks. Even if it miraculously drops down to 8 and hangs out there for a bit someday wildly contradicting the claim, then rest assured that it would just be a coincidence.
She uses data that goes all the way back to mid-2006 to make her point. Oh the things that can be done with 3 1/2 years of historical data. I could probably predict the next ice age if I set my mind to it.
July 10, 2009
'Oil to natural gas price ratio to stay at 6:1'
It's based on energy equivalent. So, basically, if you burn a barrel of oil, you get about 6 million BTUs of energy out of it. If you burn one Mcf of gas, you get about a million BTUs out of it. So the assumption has been that 6 Mcf of gas is, therefore, equivalent to one barrel of oil, which makes sense on an energy equivalent basis.
In the ultra long-term, I'm thinking the ratio has fundamental reasons to come back down to 10. I guess you could say that I just don't think it is different this time. I'm no expert though.
If only I could remember what this ratio did during the last housing bust in the early 1990s to see if spikes like this were even remotely normal. Sadly, that would require my eyes to drift back up to the chart again. I'm just too lazy. Sorry. Do let me know if you spot anything that looks like a massive spike though. Rumor has it that oil hit $36 a barrel in October 1990. In hindsight, I'm told it was an awful time to back up the truck (pun intended).
See Also:
Trend Line Disclaimer
Source Data:
EIA: Petroleum
EIA: Natural Gas
NBER: Business Cycle Expansions and Contractions
"I could probably predict the next ice age if I set my mind to it."
ReplyDeleteMy friend, I believe you could.
Now, how about you predict the next Iceland age? And the rest of us will trade on it!! Woohoo!!
Nice Post Mark! I also liked the Sure thing article, it saves me some time from ready "the black swan"...
ReplyDeleteWhat do you think of income funds as a source of "riskier" income for someone who does not have a nest egg (or storage place for toilet paper)? :D
The reason why a 10:1 ratio makes more sense than 6:1 is that (a) petroleum has more alternate uses as a feedstock than natural gas and (b) liquid fuels make more sense for transportation applications than natural gas. So you'd expect the oil to sell at a premium over natural gas, considered on an energy-equivalent basis.
ReplyDeleteBut remember, it's different this time!
Nice post!
ReplyDeleteMark, you have a lot of really good graphs. Is there any way you'd be willing to make some of them a "special feature," and maybe update them quarterly?
I'm thinking of this graph (NG to oil), the Al vs Ag, the quantitative printing press versus quantitative copper mining, and a few others.
You've really done some nice work.
-jus me
G.H.,
ReplyDeleteI can't speak for Iceland, but I did see Zombieland! I know where there is a place untouched by all this crap.
http://www.imdb.com/title/tt1156398/quotes?qt0995098
Okay, maybe I don't, lol. ;)
Remy,
ReplyDeleteI wish I could tell you how to make money off of money as we head into the future. If you are young and do not yet have a nest egg, then you might consider investing more in yourself. Use the money to learn something that makes your job skills more marketable.
The alternatives don't look all that good to me. Take this...
Credit Union Pays Savers to Close Their Accounts; Deposit Insurance Makes Saving Accounts a Losing Proposition for Banks
http://tinyurl.com/y8kzgbp
The headline says it all.
Who Struck John,
ReplyDeleteWhat you say makes a great deal of sense.
jus me,
ReplyDeleteI'll think about it but I must tell you that I was born with a "lazy" gene, lol.
I don't think I have it in me to do a lot of charts all at once any more.
I have done so many different charts. I wouldn't even know where to start to prioritize the important ones.
That said, I am always willing to take special requests of charts I have done though.
Here's a quick verbal update to a previous natural gas related chart for your amusement.
http://illusionofprosperity.blogspot.com/2009/12/natural-gas-vs-unleaded-gasoline.html
January's data point is $2.73 for gasoline and $4.44 for natural gas. That is NOT how we want to return to the red trend line.
Mark - from your posts, you are certainly not lazy!
ReplyDeleteBut probably get bored with busy-work.
- jus me
Thanks for the advice Mark! I like to think i am marketable for the foreseeable future(don't we all?). Just don't know what to do with cash. I am young enough to take on some risk though.
ReplyDeleteI also don't think you are lazy! Weren't you the one who invented Halo?
jus me,
ReplyDeleteI am not easily bored but I do think you are onto something by calling it busy-work.
Making a chart of something new is fun. It interests me and I often only partially know in advance what I expect to see.
Updating a chart is often work. That's especially true if the data stays on trend.
This particular chart was a lot of fun. I did not know what the trends would look like until I did it. I would like to update this chart in the future if the trend changes.
remy,
ReplyDelete"They" just tease me about Halo because I once worked at a computer game company.
I haven't even played Halo, much less worked on it, lol.