Oil Price To Natural Gas Ratio

What Is the Oil Price to Natural Gas Ratio?

The oil price to natural gas ratio is a simple market indicator that compares the dollar price of crude oil to the dollar price of natural gas. It is most commonly calculated as:

Ratio = (Price of crude oil in $ per barrel) ÷ (Price of natural gas in $ per MMBtu)

Because oil is quoted in dollars per barrel and natural gas is quoted in dollars per million British thermal units (MMBtu), the resulting number is unitless and shows how many dollars of oil equal one dollar of gas in current market pricing. Practitioners often express it as “X:1” (for example, 10:1).

Why it matters

– Relative valuation: The ratio shows whether oil is relatively expensive or cheap versus natural gas, which can inform trading and allocation decisions.
– Energy substitution signals: Producers, refiners and industrial users may consider substitution, fuel switching, or investment incentives depending on relative prices.
– Trading/strategic use: Commodities traders and energy analysts use the ratio to identify potential mean-reversion trades (buy the relatively cheap commodity, sell the relatively expensive one).

Common market convention versus energy-equivalent view

– Common convention: Use oil $/barrel divided by gas $/MMBtu (this is how the widely cited historical ratios are reported).
– Energy-equivalent approach: Because 1 barrel of crude oil contains roughly 5.8 MMBtu of energy (U.S. Energy Information Administration, EIA), one can compare on an energy-equivalent basis: convert gas price to “$ per barrel equivalent” by multiplying gas $/MMBtu × 5.8. That yields a different number and can be more meaningful when comparing intrinsic energy value rather than market-quoted units.

Historical context and examples

– Long-run average (pre-2009): roughly 10:1 — e.g., $50 per barrel oil vs. $5 per MMBtu gas.
– April 2012 spike: ratio ~50:1 (oil ≈ $120/bbl, gas ≈ $2/MMBtu) — big divergence driven by shale gas oversupply and strong oil fundamentals [MacroTrends; Investopedia].
– Mid-2014 to early-2015: oil fell to about $45/bbl, bringing ratio near 16:1.
– April 2020: an extreme market shock saw oil around $15/bbl and gas ~$1.91/MMBtu, giving roughly an 8:1 ratio [Investopedia; MacroTrends].
(Contract specs and unit context: NYMEX crude oil futures represent 1,000 barrels per contract; NYMEX Henry Hub natural gas futures represent 10,000 MMBtu per contract — see CME Group for contract specs.)

How traders and investors use the ratio

– Mean-reversion strategy: If the ratio is far above historical norms, traders may buy natural gas and/or short oil; if far below, buy oil and/or short gas.
– Relative-value pairs trades: Long one commodity and short the other to isolate the spread/ration movement while hedging broad market direction.
– Tactical asset allocation: Energy portfolio tilting between oil-linked vs. gas-linked exposures (futures, producers, midstream companies, ETFs).

Practical steps — how to use the ratio responsibly

1) Choose your data sources
– Reliable price feeds: CME Group (NYMEX/ICE), EIA, Bloomberg, Refinitiv, MacroTrends, public exchanges.
– Confirm quoted units: oil in $/barrel; gas in $/MMBtu (Henry Hub spot/futures).

2) Calculate the ratio

– Simple market convention: Ratio = Oil $/bbl ÷ Gas $/MMBtu.
– Energy-equivalent conversion (optional): Oil $/bbl ÷ (Gas $/MMBtu × 5.8) — for comparison on an energy-content basis.

3) Construct a historical baseline

– Compute rolling averages (e.g., 1-year, 3-year) and percentiles to see where current ratio sits relative to history.
– Visualize the ratio over time (charting daily or weekly values) to detect regime shifts.

4) Define rules and thresholds

– Entry: e.g., go long oil (or short gas) when ratio falls below the lower Xth percentile or a specified multiple of standard deviation below mean.
– Exit: revert to mean or reach a profit target; incorporate time limits if no reversion occurs.
– Example: If historical mean = 10 and current = 6, you might plan a long oil vs. short gas trade assuming mean reversion, with stops and maximum holding periods defined.

5) Choose instruments and execution plan

– Futures: CL (WTI crude) and NG (Henry Hub natural gas) futures on CME — offers liquidity and direct exposure (note contract sizes and margin requirements).
– Options: Use options to define risk and limit losses.
– ETFs/ETNs: USO (oil), UNG (natural gas) and others provide easier access but come with roll/contango and tracking issues — research structure before use.
– Producer equities: long/short positions in oil and gas E&P stocks can be an alternative but introduce company-specific risk.

6) Risk management

– Position sizing and diversification to limit exposure to one-sided shocks.
– Use stops or options as hedge for tail risk.
– Be mindful of margin calls and required capital for futures.
– Monitor macro drivers (weather, storage/inventories, OPEC decisions, geopolitical events, pipeline outages) that can cause prolonged divergence.

7) Backtest and paper trade

– Before using real capital, backtest your ratio-based rules on historical data and paper-trade the strategy to check performance and drawdowns.

8) Monitor fundamentals and regime changes

– Structural changes (e.g., sustained shale gas supply, new LNG export capacity, fuel-switching constraints, policy shifts) can change what “normal” looks like — modify models accordingly.

Limitations and caveats

– Different demand drivers: Oil and gas serve different primary end uses (transport fuel vs. heating and power) and react differently to economic cycles and seasonality.
– Regional pricing differences: Gas prices can be highly regional due to pipeline constraints or local supply/demand; Henry Hub is a U.S. benchmark but not universal.
– Contango/backwardation and roll yield: ETFs/ETNs and futures positions are affected by curve shape and roll costs.
– Structural shifts: Technology, regulation, energy transition and LNG/globalization can change historical relationships.
– Not a guaranteed predictor: Ratio extremes can persist or move further—use stops and limit leverage.

Quick worked examples

– Simple convention: Oil = $50/bbl, Gas = $5/MMBtu → Ratio = 50 ÷ 5 = 10:1 (historical “typical”).
– April 2012 example from historical reporting: Oil $120/bbl, Gas $2/MMBtu → Ratio = 120 ÷ 2 = 60:1 (Investopedia reported ≈50:1 in that period depending on exact quotes).
– Energy-equivalent view: If Gas = $5/MMBtu, equivalent price per barrel = 5 × 5.8 = $29/bbl (so oil at $50 still trades at ~1.72× the energy-equivalent price).

Bottom line

The oil-to-natural-gas price ratio is a straightforward, widely used metric for assessing the relative valuation of two major energy commodities. It can inform relative-value trades and tactical allocation decisions, but it should be used together with fundamental analysis, careful risk management, and awareness of market structure and contract specifics. Backtest any rules, define clear entry/exit and risk parameters, and choose appropriate instruments for implementation.

Sources

– Investopedia. “Oil Price to Natural Gas Ratio.” (source URL provided)
– CME Group. “Crude Oil Futures — Contract Specs.” “Henry Hub Natural Gas Futures — Contract Specs.”
– MacroTrends. “Crude Oil vs. Natural Gas — 10 Year Daily Chart.”
– U.S. Energy Information Administration (EIA). Energy equivalence and Btu conversion guidance.