What is the Relationship Between Crude Oil and Natural Gas?

What is the Relationship Between Crude Oil and Natural Gas?

Business

Crude oil and natural gas are both fossil fuels used for heating. They are formed from the remains of dead plants and animals. The two fuels serve similar purposes, but their effects and results may differ. Crude oil is a flammable liquid composed of hydrocarbons and other organic compounds found underground through oil drilling. Natural gas consists mainly of methane and hydrocarbons or ethane. 

In terms of use, demand for crude oil is higher overall.

Crude oil and natural gas are vital energy materials for transportation to make vehicles work. However, with the progress of automobile manufacturing technology, the demand for crude oil is increasing, and most automobile fuels use crude oil. Moreover, because crude oil is cheaper, most vehicles and machines become designed to run on crude oil rather than natural gas. 

Crude oil is also a major component for making women’s cosmetics, plastics, and rubber. This is another reason for the high demand for crude oil. Natural gas is used as a fertilizer as a result of its natural production of ammonia. Which is very helpful for plant growth. 

From the point of view of environmental protection, it is better to use natural gas than crude oil.

As a result of natural gas being safer for our environment. Compared with crude oil and other gases, natural gas is the cleanest fuel, and it produces less carbon dioxide. Burning natural gas produces 30 percent less carbon dioxide than crude oil or oil, and 45 percent less than burning coal.

Since crude oil and natural gas are the major fuels in the global energy mix, they have an impact on a wide range of market areas such as trading strategies, investment decisions, energy policies and portfolio optimization. And the prices of the two commodities have historically moved in tandem because of their tight links in supply and demand. But this coincident price relationship reached an inflection point after 2008 and has since decoupled. 

Natural gas and crude oil markets have links through substitution and competitive effects. Before 2008, crude oil and natural gas prices mostly moved in tandem, except for some periods when natural gas prices soared. These price shocks may be due to commodity-specific events.

Due to seasonality, reserve dynamics, and weather-related events, natural gas is more vulnerable to short-term price shocks and supply imbalances, which typically increase volatility and lead to imbalanced near-term oil and gas co-movements. In 2005, for example, supply disruptions caused by Hurricanes Katrina and Rita triggered a sharp spike in natural gas prices, with an insignificant impact on oil prices.

The link between crude oil and natural gas changed in the early 2000s as more natural gas reserves became discovered in the United States.

The discovery of huge new natural gas reserves in the Marcellus and Utica shale plays in the United States has changed the price relationship between crude oil and natural gas. Between 2000 and 2014, US natural gas prices fell while oil prices continued to rise. Crude oil prices fell sharply from late 2014 to early 2016 as growth in emerging economies slowed and demand for oil fell. Crude recovered to above $70 a barrel by 2018. However, fell to historic lows as the emergence of the coronavirus in 2020 all but halted demand for oil. Natural gas is down slightly, but it’s holding steady. Crude rebounded above $92 a barrel by early 2022, and natural gas followed suit, but not by nearly as much.

Understanding the price relationship between two goods of the same use can give us clues about future price movements. When one commodity becomes more expensive than another, there is usually a reason. In the case of oil and gas, it is usually supply and demand that drives the change. Proven and probable reserves of natural gas will cause its price to fall sharply. This has led to a wider than usual price gap between goods. The return to normality in price differentials can also be the result of people substituting one good for another. 

People will give up expensive goods for cheaper ones. If oil prices rise, demand for natural gas will increase. This will lead to lower oil prices and higher gas prices until the market stabilizes again.

Written by Anyu Mei

British Petroleum’s Head Quant Cetin Karakus on Machine Learning​ & Big Data​ in the Energy​ Market

What is the Relationship Between Crude Oil and Natural Gas?

Business