US still oil focused despite lower oil/gas ratio

OREANDA-NEWS. September 08, 2015. The ratio between oil and natural gas prices in the US has narrowed by 70pc from its peak in April 2012, but that has yet to prompt a significant shift away from oil drilling in favor of dry-gas drilling.

The current ratio between WTI oil and US natural gas prices is trading at 16, its lowest level since 2010 and far below the April 2012 peak of 53, according to an analysis by Barclays.

Up until 2009, the ratio between WTI oil and US natural gas historically ranged from 8 to 13. In 2009 that changed and the ratio grew when oil prices rebounded following the global financial crisis and gas prices moved lower amid prolific production from shale hydraulic fracturing.

While the widening of the oil-to-gas ratio in 2011-12 prompted producers to shift their focus from gas to oil, the opposite has not occurred as the ratio has narrowed, even as oil producers have seen a revenue fall four times larger than natural gas producers. Barclays said there was a shift from oil making up 28pc of total production on a Btu basis in 2011, to about 44pc in 2015.

The current US rig count has 662 rigs drilling for oil and 202 drilling for gas, according to Baker Hughes. The peak natural gas rig count was 1,606 on 12 September, 2008, with 413 rigs directed at oil. When the oil rig count peaked at 1,609 rigs on 10 October, 2014, there were 320 rigs drilling for natural gas.

Producers are opting to stick with oil amid its higher net revenue and current futures curve assumptions that crude prices will rise and the ratio between oil and gas will widen, Barclays said.

There are about 5.8 mmBtu in a barrel of oil, which means that oil should trade at about six times the price of natural gas.

"If that relationship actually held, it would be great news for gas producers because US natural gas prices would be trading at around \\$7/mmBtu as opposed to sub-\\$3/mmBtu," Barclays said. Producers are still netting \\$4.50/mmBtu more from oil than gas.

Since oil is traded internationally and natural gas produced in the US is largely limited to delivery in North America, that is contributing to gas trading far lower than its energy equivalent, relative to oil.

That picture could change once US LNG exports begin in the next year. But the fall in the oil-to-gas ratio might become a concern for LNG exporters, as the wide spread between the two was what made LNG exports more attractive than oil to buyers in the first place.