THE COMPLEX AND NUANCED RELATIONSHIP BETWEEN OIL AND NATURAL GAS PRICES IN THE US
The future relationship between natural gas and oil prices remains a primary concern in the boardrooms of most energy companies today, both buyers and sellers. Understanding the relationship is critical both for effective portfolio risk management and for successful long-term investment decision making. This critical price relationship is no less a concern for governments of both producing and consuming nations mindful of their budgets and trade balances. The debate has intensified as oil and gas prices during much of 2006 once again became disconnected in North America. CERA has examined the linkages between oil and gas markets across several key dimensions and within a variety of time horizons, from both a fundamental and a statistical perspective, and both yield the same conclusions:
* There is an underlying structural relationship that exists between gas and oil prices over the long term, and it is for this reason that gas and oil prices trend together through time.
* The long-term relationship between oil and gas prices in North America is expected to hold in the future.
* The short-term oil and gas price relationship in North America hinges primarily on the tightness or looseness in the supply-demand balances for North American natural gas and global oil.
* Corporate price decks used to screen and justify long-term investment decisions need to be consistent but also recognize the scope for significant periods of price divergence; otherwise a company risks making skewed and subeconomic investment choices.
* Since oil and natural gas prices can diverge, they present different market risks and different price floors.
* Oil price forecasting and natural gas price forecasting require different approaches. Oil prices are more greatly influenced by ""nonmarket"" factors such as geopolitics. North American tural gas prices reflect more accurately their own market fundamentals.
