The correlation between crude oil and natural gas prices is no longer pertinent after reaching an inflection point in 2008 because of the shale revolution.

In the past, the prices of the two commodities have often moved alongside each other because of demand and supply issues. The price relationship reached an “inflection point after 2008 and they have since decoupled,” according to a May research report written by Adila Mchich, an energy economist of the CME, a Chicago-based commodities derivatives exchange.

The success from the shale revolution has “redefined the supply structure of the two fuel sources and has led to the decoupling of oil and gas prices,” she wrote.

“The energy arbitrage between the two fuel sources was a significant determinant of their long-term price relationship, which in the past was relatively stable,” Mchich wrote. “This fundamental shift is likely to prevail in the foreseeable future, unless the supply-induced downward pressure on gas prices is alleviated by a significant increase in exports of U.S. natural gas in the form of liquefied natural gas.”

Outside of global GDP demand, the prices of natural gas and crude oil should not have a fundamental linkage because they each have a different source of demand and global tradability costs, said David Beard, director of research and lead E&P analyst for Coker Palmer Institutional in New Orleans.

“We’ve never been a proponent of the linkage between natural gas and oil prices,” he said.

Transportation plays a large factor in driving oil demand, including cars, trucks and jets while power generation and industrial uses drive natural gas demand.

The trading of the two commodities is also disparate. Crude oil is a globally-traded commodity and transportation costs consist of 10% or less of the final product price while natural gas is generally not traded globally, and the entire transport cost can be one to two times the cost, including cooling, shipping and warming, said Beard.

“Geopolitical risks play a meaningful role in setting oil prices, while natural gas prices are generally regional,” he said.

The crude-gas ratio stayed strong until 2014 and in response, more companies drilled for oil instead of natural gas, Mchich wrote. As the shale play from the northeast Marcellus shale play increased, natural gas prices felt the downward pressure and started declining.

Natural gas prices are also affected more by short-term price shocks and supply imbalances due to seasonality, storage dynamics and weather-related events, resulting in more volatility and a loss in stability to the short run oil and gas linkage, she wrote.

“For example, in 2005 hurricanes Katrina and Rita caused a supply disruption that triggered a significant spike in natural gas prices, while the impact on oil prices was not significant,” Mchich wrote.

Geopolitics also plays a larger factor in affecting oil prices—oil prices hit $145/bbl in July 2008, but then collapsed to below $40/bbl in the aftermath of the credit crunch and recession.

After 2008, the price relationship between the two commodities changed and natural gas prices separated from oil prices.

Global crude oil prices are determined by Saudi Arabia, said Ethan Bellamy, a managing director who covers energy stocks at Baird, a Milwaukee, Wis.-based investment bank.

“The oil market is rigged by OPEC and, in particular, the Saudis,” he said.

As the population and budget concerns rise in the country, the Saudis will require a larger revenue stream and have an “increasingly narrow window in which to manipulate prices to maximize revenue,” Bellamy said.

The recent downdraft in crude oil prices is “entirely due” to OPEC and other larger producers who could potentially loosen their supply agreement, he said.

Natural gas prices are more efficient, but the shale boom resulted in a large gas surplus that has led to consistently low prices that should prevail for some time.

“There’s no one manipulating prices higher by artificially withholding supply,” Bellamy said.

Oil production increases as oil prices rise, resulting in more natural gas supply with an effective zero dollar marginal cost. The key phenomenon occurring now is that a large proportion of the supply of natural gas supply in the U.S. is derived from “associated gas” production, which means it is the result of as a byproduct of oil drilling, especially in the Permian Basin.

“The more gas supply in an unconstrained, non-manipulated market, as is the global case for oil, the lower the natural gas price,” he said. “Conversely, if oil prices fall, that will stymie oil-directed drilling, lowering natural gas supply and raising its price.”

Unless OPEC is dissolved, crude oil and natural gas will not start trading in tandem again, Bellamy said.

OPEC and Russia have been successful in cutting production to reduce a 1.5 million barrel glut that was depressing prices, but predicting the direction and level of oil and gas prices is a ‘fool's game,’” said Bernard Weinstein, an associate director of the Maguire Energy Institute, Cox School of Business, Southern Methodist University in Dallas.

“No one ever gets it right,” he said.

The U.S. is not a global player in the natural gas market, yet. The current drilling boom has flooded the market with natural gas, so prices will likely remain depressed for several years.

“Domestic over production is likely to continue for several years, so prices should remain close to $3 per million BTUs,” Weinstein said.

Concerns about the oversupply of gas products has resulted in the inability for the New York Mercantile Exchange’s gas futures market to hold a price of $3 or higher outside of blips in January, said Richard Redash, head of North American gas and power research, analytics at S&P Global Platts in New York.

Oil is estimated to reach $69/bbl for 2018 and falling back down to $64/bbl in 2019 because of concerns of an oversupply that is driven by U.S. shale growth and potential OPEC supply, Beard said.

Natural gas prices will be $2.68 in 2018, reaching $3 next year based on moderating associated gas supply which is somewhat offset by robust Mexican and LNG export demand, he said.

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