Natural Gas and Crude Oil Correlation

We’ve heard a lot of news about oil prices falling over the last few months. Currently prices have fallen over 35% since the peak back in July. Does this free-fall behavior in the oil markets have any impact on the regional price you pay for electricity and/or natural gas? The simple answer is: not at the current price differentials.

Since the natural gas shale revolution, natural gas and oil have had a very low correlation coefficient, meaning the price move of one commodity does not elicit an equal or similar price move in the other commodity.

 

Graph1

 

The graph above is a great representation of this behavior. The orange line represents the spot price of crude oil and the blue line represents the spot price of natural gas. The chart shows the individual commodity prices over the course of 2014.

Notice how natural gas spiked last winter while oil remained relatively tame. Look again to July, where oil began its downward spiral. Over that 5-month period oil dropped more than 35% while natural gas remained flat or higher over that same time period. The difference is that the price of oil is driven by world supply and demand, while natural gas — especially since the advent of shale — is largely driven by our domestic supply and demand.

Oil prices would have to fall considerably further than they have to induce fuel switching from natural gas. When OPEC decides they are not going to cut oil production to avoid a potential over-supply, oil pricing is directly impacted, but the fundamentals of natural gas prices are not driven by oil prices. In this case, we may see oil fall, while natural gas pricing remains unchanged or could even increase. While the energy headlines show collapsing oil rates, it’s important to understand that these moves do not translate directly to lower electricity and natural gas rates.

energy industryenergy procurement

About the author

Jesse Ram

Jesse works with clients to help them meet their sustainability goals while reducing expenses and generating revenue through community solar, land leases, and distributed generation resources. He provides clients with analytically based insight and actionable information to reduce overall energy costs and improve performance.

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