The rapid collapse of U.S. oil futures this year caused crude’s premium over natural gas to drop to near parity on an energy equivalent basis for the first time since 2008.
That could prompt producers to search for more gas in coming months if demand recovers as expected when the economy snaps back after governments loosen travel and work restrictions once the spread of the coronavirus slows.
For now, however, both oil and gas prices have plunged as the coronavirus causes energy demand to vanish as offices close and factories run at reduced capacities.
Since the start of the year, U.S. crude futures have tumbled over 80% to their lowest since 1998 due to the combined impact of coronavirus demand destruction and a price war between Saudi Arabia and Russia.
Gas futures, meanwhile, were down less than 20% so far this year due primarily to the pandemic’s demand loss.
Over the past several years, U.S. energy firms have focused their drilling on finding more oil in part because crude was much more valuable than gas.
In some shale oil basins like the Permian in West Texas and the Bakken in North Dakota, that crude has come out of the ground with more associated gas than regional pipeline infrastructure could handle, causing some local gas prices to turn negative and energy firms to flare or burn unwanted gas.
The oil-to-gas ratio, or the level at which oil tradescompared with gas, fell to 6-to-1 on Monday. That is down from a six-year high of 31 times over gas in January. On an energy equivalent basis, oil should trade six times over gas.
Now that crude prices have dropped, analysts expect U.S. producers to cut oil drilling in shale oil basins, which should make output from gas wells in other basins, like the Marcellus and Utica in Pennsylvania, West Virginia and Ohio, more valuable.
That’s why gas prices (up 3%) and the stocks of several gas-focused energy firms like Antero Resources Corp (up 16%), EQT Corp (up 5%) and Range Resources Corp (up 5%) are rising.
an energy equivalent basis for the first time since 2008.
Gas futures at the Henry Hub benchmark in Louisiana, however, are still on track to drop in 2020 to their lowest annual average since 1998.
So far in 2020, crude has traded about 22 times over gas. That compares with 22 times over gas in 2019 and 19 times over gas during the prior five years (2014-2018).
