Premium of U.S. oil over natural gas falls to lowest in over a year

The collapse of U.S. oil prices earlier this week and a rise in natural gas futures cut the oil-to-gas ratio to its lowest since January 2019, as some analysts saw a silver lining in the oil price drop for gas output.

Gas bucked the rest of the energy sector on Monday, jumping as much as 7%, even as oil prices suffered their worst day since the 1991 Gulf War due to a price war between Saudi Arabia and Russia that threatened to overwhelm markets with supply. [O/R] [NGA/]

The oil-to-gas ratio, or the level at which oil trades compared with gas, fell to 18-to-1 on Monday. That compares with a recent six-year high of oil trading 31 times over gas in January.

In recent months, gas prices have suffered because oil producers, who were profiting from strong worldwide demand for crude, also produce a ton of what’s known as associated gas - gas that is a by-product of crude output.

Now that oil prices have dropped to their lowest since 2016, analysts expect U.S. producers to cut new oil drilling in the shale basins that produce most of the associated gas like the Permian in West Texas and eastern New Mexico.

That would result in less associated gas production, making output from gas wells in other basins, like the Marcellus and Utica in Pennsylvania, West Virginia and Ohio, more valuable.

That’s why gas prices and the stocks of several gas-focused energy firms like EQT Corp (up 10%), Southwestern Energy Corp (up 17%) and CNX Resources Corp (up 8%) and Cabot Oil & Gas Corp (up 3%) are rising this week.

Traders said U.S. demand for gas could rise in coming months as low prices encourage power companies to burn more gas than coal. Gas has been the leading source of U.S. electric generation after it took that title from coal in 2016.

Despite recent gains in gas futures, analysts still expect gas prices at the Henry Hub benchmark in Louisiana will drop in 2020 to their lowest annual average since 1998. [NGAS/POLL]

On an energy equivalent basis, oil should trade 6 times over gas.

So far in 2020, crude prices have traded about 27 times over gas. That compares with 22 times over gas in 2019 and 19 times over gas during the prior five years (2014-2018).

The ratio peaked at 54-to-1 in April 2012 and bottomed at 3-to-1 in December 2000.

Reporting by Scott DiSavino; Editing by Bernadette Baum