Ferguson’s Forecast: Gas & Oil Follow the Same Beat

By Published On: June 4, 2005

Natural gas prices continue to befuddle analysts by doggedly tracking the price of oil. Since the beginning of the year, gas prices have moved up and down in lockstep with oil, with gas averaging about $2/MMBtu less than oil on an energy basis. After peaking last fall in the aftermath of Hurricane Ivan, oil and gas prices retreated. Gas began the year at $6/MMBtu. In mid-February, oil and gas prices began to climb, with gas reaching a peak of $7.75/MMBtu and oil a peak of $9.81/MMBtu on April Fools? Day. (A barrel of oil provides about 5.8 MMBtu of energy. Oil prices cited here are for West Texas Intermediate; gas prices are for the NYMEX near-month contract.) Prices then retreated as the heating season ended, with oil hitting a low of $8.07/MMBtu on May 20 and gas a low of $6.12/MMBtu on May 26. Since then, prices have started back up. As I write this on June 2, gas is trading at $7.00/MMBtu and oil is at $9.33/MMBtu ($54.45/barrel). As I have pointed out before, there is no obvious reason why oil and gas prices should move together when the price differential on an energy basis is $2/MMBtu. Oil and gas can compete for some customers that are able to switch fuels when the cost of energy from either is about the same. But with a $2 differential, no fuel switching is taking place, and one expects to see oil and gas prices marching to different drummers. But apparently they are hearing the same beat. What will happen if oil prices skyrocket? Will gas prices follow? According to some analysts, we could see oil prices as high as $17/MMBtu ($100/barrel) before long. Surely gas prices could not follow along to $15/MMBtu. Or could they?

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