We’ll meet again: oil to gas price gap shrinking rapidly

With the spread between natural gas and oil contracting rapidly, Bjarne Schieldrop, chief commodities analyst at SEB, thinks that a bullish tailwind for oil is at risk and right now both oil and natural gas prices are racing towards each other at a rapid pace.

“Natural gas prices have been much higher than oil prices since late July 2021. This has created a tremendous bullish tailwind for crude oil. As weeks and months have passed by in this situation, industries across Asia and Europe have had time to adapt and switch from expensive natural gas to “cheap oil”. This bullish tailwind is now at risk.

“Natural gas to oil difference has now fallen to only USD 35.7/boe (still high) and lowest since September 2021. Oil and gas will meet again. Right now, they are racing towards each other.

“With the spread contracting rapidly, a bullish tailwind for oil is at risk. We have talked quite a few times about how the very high natural gas price must be a very bullish element for crude oil in general and for light sweet crudes like Brent especially. And we are convinced that this is a very important reason for why the global oil market is as tight as it is.”

Switching to ‘cheap oil’

“From now to March 2023 European and Asian natural gas is priced 50% above Brent crude in the forward market. Any industry in its right mind will switch to ‘cheap oil’ at only USD 94/bl rather than to pay USD 133/boe for natural gas (recently priced at USD 150/boe).

“This wide spread in favour of natural gas has now been in place since July 2021. And the longer it stays intact the more switching there will be as it allows industries time to switch. Natural switching should occur in power, refineries and petrochemicals but also any other industrial activity where natural gas is used for processing heat or other purposes. This could easily sum up to 2-3 m bl/d of added oil demand in our view. Highly untraceable or detectable and out of sight. But this bullish drive for crude oil will be lost the moment natural gas price moves back down to parity or below oil again. And it will.

“The front-end natural gas price versus Brent crude has this morning traded down to only USD 35.8/boe. That is still very high, but it is the lowest since September 2021.

“Either oil will move up to natural gas or natural gas will move down to and below oil. Right now both are moving towards each other at a rapid pace.”
A copy of the full report is available here.