Premium of U.S. oil over natural gas hits 11-year high on natural gas price plunge
(Reuters) - The collapse of U.S. natural gas prices this week elevated the oil-to-gas ratio to its highest since May 2012, which should prompt energy firms to drill for more oil and less gas.
Gas prices collapsed to a three-year low for a third day in a row on Friday, having fallen by 28% so far this year, on near record output and as mostly warmer-than-normal weather this winter depressed demand for heating.
That caused utilities to leave more gas in storage than usual this winter. Analysts forecast that stockpiles were currently around 15% higher than normal for this time of year.
Oil futures, meanwhile, were up about 6% so far in 2024.
The oil-to-gas ratio, or the level at which oil trades compared with gas, jumped to 41-to-1 on Friday.
On an energy equivalent basis, oil should only trade six times over gas.
So far in 2024, crude prices have traded about 30 times over gas. That compares with 30 times over gas in 2023 and 20 times over gas during the prior five years (2018-2022).
The ratio peaked at 54-to-1 in April 2012 and bottomed at minus 20-to-1 in April 2020 when oil futures traded below zero.
With oil now even more valuable than gas per unit of energy, analysts expect producers to cut the number of rigs drilling for gas and increase their search for oil.
But it will be tough to reduce gas output because a lot of oil - especially in shale oil producing basins like the Permian in Texas and New Mexico and Bakken in North Dakota - comes out of the ground with what the industry calls associated gas - gas that is a by-product of crude output.
The U.S. Energy Information Administration (EIA) projected gas production would rise to 104.37 billion cubic feet per day (bcfd) in 2024 and 106.46 bcfd in 2025 from a record 103.75 bcfd in 2023.
Most of those increases will come from the Permian and Bakken shale oil producing basins where EIA projected output through the end of February has soared by 12% and 13%, respectively, over the past year.
During the same time, however, EIA projected gas output in the biggest shale gas producing basins would rise by just 2% in Appalachia in Pennsylvania, Ohio and West Virginia, and decline by 3% in the Haynesville area in Louisiana, Texas and Arkansas.
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