If you’re an active trader in the oil and gas business, you would have heard of the debate about how oil and gas prices are linked and to what extent does the connection hold. We’re going to be exploring the relationship between crude oil and natural gas prices.
Crude Oil and Gas prices
From the records on the price of Brent Crude and Natural Gas, both commodities fell sideways to lower for six months in 2017. However, between June 2017 and May 2018, the price of crude oil has risen higher than it was while natural gas remained flat. Both commodities declined in the fourth quarter of 2018 again but there was some relief in the market as a sell-off in crude occurred in October while natural gas prices stayed steady until December when they started falling.
Between January and April of 2019, the oil prices recovered from their fall while natural gas continued suffering a loss but all that improved towards the remaining half of the year when the price of gas started rising higher. With this little tale on the journey of oil and gas price, there seems to be little correlation between both commodities over the period in review but if you can make certain research on platforms that give information regarding the sale of oil and gas such as Oil Profit, you will get the required information you need.
Looking at the data from Energy Information Administration, you will get a preview of the correlation between crude oil and other mineral resources.
Correlation between Natural Resources
Correlation between mineral resources stands for the extent of price movement between two assets. This movement is called the correlation coefficient. So for example, if natural gas has a 0.25 rise in its value, the correlation coefficient in crude oil will be around 25% of the change in gas prices.
Correlation is not a cause-and-effect indicator. However, it can serve as an indicator of the similarity that exists between the price of these two resources.
Fundamentals of Changing Correlation
To explain the delinking of crude oil and natural gas prices, hydraulic fracturing and horizontal drilling technologies have to increase shale production. Because gas is a regional product while oil is global, increased production of gas for domestic use has driven the price of the commodity down to be in relation with oil’s price. However, periods of correlation can arise again because oil and gas are close substitutes for each other.
From our observation, we can say that oil has been the deciding factor in the relationship between the price of both commodities as oil have a much higher tendency to affect the prices of natural gas. Remember that from 2003 to 2008, there has been an evident positive correlation between both commodities as the price range from 0.25 to >0.65.
The relationship between both commodities started peaking from the second quarter of 2004 and the Q2 and Q3 of 2005 and kept on building momentum through 2008. However, from little research, we found that there was little or no correlation between such resources from 2009 through to 2020 asides from irregular quarters.
Bottom Line
Due to the price pattern of these resources over the years, we cannot make definite conclusions on the correlation between crude oil and natural gas price. But while other countries of the world have great reliance on oil, we may never know the real relationship between oil and gas as every indication shows that oil is the driver of the price market between the two.
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