What's Behind the Natural Gas Price Disparity? (PART1)

A few weeks ago, as natural gas prices in the U.S. continued to set multi-year lows, there appeared to be no end in sight for just how low prices would go.

But alas, some temporary relief has come for natural gas pricing. Now that the global recession is spreading (as we warned of several months ago), crude pricing has corrected, while natural gas has bumped up in price. However, the longer-term trend for natural gas remains bearish, while that of crude oil remains bullish.

The severe and persistent weakness in natural gas pricing has already caused producers to face numerous issues. Notably, these issues have trickled down to the underlying natural gas-related securities, specifically many MLPs and Canadian oil trusts. But Canadian oil securities have been hit especially hard due to a much larger drop in crude pricing for reasons we will discuss in Part 2.

In this article, I am going to focus on the two most prominent trends seen today in natural gas pricing:

1. the spread in pricing between natural gas and crude oil seen in the U.S., and
2. the spread between natural gas pricing in the U.S. versus Europe.

The Price Disparity between Natural Gas and Crude Oil

Over the past couple of years, natural gas pricing in the U.S. has collapsed while crude oil has remained high (short of the current correction). This relationship has obliterated the energy equivalency ratio which is historically been around 6:1. 

In 2010, the oil to gas ratio hit what was then a record-high of 25:1. This may have sucked some investors into natural gas with the notion that pricing would rise. However, just the opposite happened.