While the Btu (British thermal unit) pricing-parity ratio between oil and gas has historically been accepted as 6:1, that ratio during the past decade has in reality fluctuated from a high of 11:1 in 1999, 2001 and 2006 to a low of 4:1 in 2000 and 2003—before drifting back to a more average 7:1 ratio in periods of normalized weather.
However, with Morgan Stanley forecasting $80 oil and Henry Hub gas of $8 for 2008—a 10:1 ratio—and Raymond James & Associates eyeing $90 oil and $6.50 gas this year—a 13.8 oil-to-gas ratio—will the industry see anything close to a 6:1 oil-to-gas pricing parity any time in the near future?
That depends on how one defines “near future.” Raymond James E&P analyst Wayne Andrews in Houston says, “During the next few years, we expect to see a longer-lived decoupling between U.S. oil and gas pricing. In fact, we expect the 13.8 oil-to-gas ratio we’re forecasting for this year to move even higher in 2009, to above 14:1.”
The reason for this severe price disconnect? “It’s due to our expectations for a structurally over-supplied U.S. natural gas market during the next few years,” the analyst says.
“A surge in unconvention­al/shale-play gas supplies, combined with rising global liquefied natural gas (LNG) supplies, leads us to believe that U.S. natural gas prices will trade substantially lower than normal, driving the oil-to-gas pricing ratio substantially higher than we’ve seen during the past decade.”
Andrews points out the problem should be particularly acute in the summer months when seasonal LNG imports to the U.S. peak.
There is, however, light at the end of the tunnel, with oil-to-gas pricing returning to a more average 7:1 parity in 2010-12, contends the E&P researcher. “The most important and timely driver will be the build-out of a global LNG infrastructure.”
This infrastructure build-out will include regasification terminals, gas pipelines, gas storage and the addition of gas-fired consumers in regions outside the U.S.—to the point where global oil and gas prices will trend back to a more sustainable 7:1 Btu parity, he claims.
In addition to gas becoming a more fungible global commodity, Andrews predicts the next decade will likely see an increase in gas-fired electricity generation, a decrease in the use of oil as a heating fuel, and the increased ability to use gas as an automotive fuel source.
The bottom line for investors: “Stay long or get longer in oily names in 2008 and beware of North American gas names; much longer term—three to five years out—gas prices will catch up with oil on a Btu basis and the gassy names will benefit.”
Lloyd Byrne, E&P analyst with Morgan Stanley in New York, remains bullish on gas long term and agrees that the globalization of the gas market that is occurring will support Btu parity with oil longer term.
“In an increasingly ‘carbon conscious’ world, natural gas remains the only viable near-term alternative to liquid petroleum fuels, increasingly uncertain investments in coal-fired generation, and the time lag before which meaningful new nuclear-powered infrastructure is available,” he says.
Against a backdrop of continued global economic growth, the analyst believes the perception of plentiful global gas reserves will begin to reverse.
Byrne’s expectations—which he sees as perhaps conservative—are for a steadily increasing gas price to $9 by 2011, with the expectation that oil/gas parity remains largely dislocated in North America, the current ratio estimated to be about 12:1. “We can see this (ratio) migrating back towards 8:1, if the global gas market accelerates even faster than we are forecasting.”

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