The rapid collapse of U.S. oil futures caused crude’s premium over natural gas to turn into a deficit for the first time ever.
If it holds, that could prompt producers to search for gas instead of oil in future months - especially if gas demand recovers as expected when the economy snaps back after governments loosen travel restrictions once the coronavirus spread slows.
For now, however, both oil and gas prices have plunged as the coronavirus causes energy demand to vanish as offices close and factories run at reduced capacities.
Since the start of the year, U.S. crude futures have tumbled over 150% to a record low below minus $37 a barrel due to the combined impact of coronavirus demand destruction and a price war between Saudi Arabia and Russia.
Gas futures, meanwhile, were down about 11% so far this year due primarily to the pandemic’s demand loss.
Over the past several years, U.S. energy firms have focused their drilling on finding more oil in part because crude was much more valuable than gas.
In some shale oil basins like the Permian in West Texas and the Bakken in North Dakota, that crude has come out of the ground with more associated gas than regional pipeline infrastructure could handle. That caused some local gas prices to turn negative and energy firms to flare or burn unwanted gas.
The oil-to-gas ratio, or the level at which oil trades compared with gas, fell to minus 18-to-1 on Monday. That compares with a six-year high of 31 times over gas in January. On an energy equivalent basis, oil should trade six times over gas.
Now that crude prices have dropped, analysts expect U.S. producers to cut oil drilling in shale basins, which should make output from gas wells in other basins, like the Marcellus and Utica in Pennsylvania, West Virginia and Ohio, more valuable.
That’s why gas prices (up 10%) and the stocks of several gas-focused energy firms like Antero Resources Corp (up 22%), CNX Resources Corp (16%) and EQT Corp (up 14%) are rising.
Gas futures at the Henry Hub benchmark in Louisiana, however, are still on track to drop in 2020 to their lowest annual average since 1998.
So far in 2020, crude has traded about 22 times over gas. That is the same as 2019’s average and compares with a five-year average (2014-2018) of 19 times over gas.