Relationship between Oil and Natural Gas Prices

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Title: Relationship between Oil and Natural Gas Prices
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Relationship between Oil and Natural Gas Prices
The assertion that an increased trade in liquefied natural gas having accelerated the
markets in North America, Asia and Europe, which were previously segmented markets, is by
all chance undisputed. This paper articulates the relationship between oils and natural gas
and why they areuncorrelated in pricing.
In the past decades, markets for natural gas have countersigned intense changes. This
was because of the liberalization of most parts of the global settings, reformation of the
supply chains which were previously vertically integrated and the continuously falling
transportation costs in global gas market (DeVany and Walls 1995).
Besides, on the basis of supply, natural gas upon extraction is often found mixed
together with oil in the wells. Natural gas was simply flared on the olden days before it could
be transported and this was done till pipelines were made capable of transporting them. Until
then, competition was a story, (Davis and Killian, 2008). At that particular point, natural gas
was extracted separately and started competing with fuel oils for heating in factory
operations. A century later, the completion placed the two fuels as energy sources in towns
(Yergin, 1991). This scenario took shape until the federal power commission (FPC) imposed
priced regulatory measures on natural gas which saw a dramatic drop in supply of the same.
From the above scenario, if both the markets are free from the controls, either in terms
of pricing or quantity, then the two commodities should show some relationships in pricing.
Crudes are also priced according to the high volume crude streams which are compared in
terms of their quality as per their API gravity.
The question as to why these two products correlate or otherwise yet they have totally
different uses and even operate in separate markets and why this study is worth it is rightfully
justified in this paper. Firstly, the connection between these products helps the international 
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energy majors in fathoming price movements between the two commodities, the behaviour in
their pricing, facilitation of project planning and maximization of their profits.
Presumably, changes in technological advancement and policy making have affected
crude oil and natural gas pricing (Blas and Hoyos, 2009). Many industrialists have the notion
that natural gas has their prices more closely connected with coal prices.
Markets in the United Kingdom have seen their liberalization for 15 years and for the
records, they have since had the link between natural gas and oil prices shoot over time. This
has since been dubbed as the aftermath of decoupling natural gas price from oil price
(Panagiotidis and Rutledge 2007). Hypothetically, the prices of natural gas and oils do not
correlate due to a number of reasons which includes among other factors, the difference in the
industrial organizational sector. This hypothetical base explains why there is dynamics in
natural gas markets.
There is a play-level model designed to analyse both natural gas and crude oil from
lower onshore sources which were 48 in number. 
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The table is as shown below:
Table 9.2. Technically recoverable U.S. natural gas resources as of January 1, 2010
trillion cubic feet
Proved Reserves Unproved Resources Total Technically
Recoverable Resources
Lower 48 Onshore
Non Associated
Natural Gas
230.0 1250.2 1480.3
Tight Gas 87.9 422.7 510.7
Northeast 5.2 51.8 57.0
Gulf Coast 24.3 96.8 121.1
Midcontinent 7.4 22.1 29.5
Southwest 3.4 24.5 27.9
Rocky Mountain 47.6 222.0 267.6
West Coast 0.0 7.5 7.5
Shale Gas 60.6 481.8 542.3
Northeast 7.1 216.5 223.6
Gulf Coast 10.9 129.7 140.6
Midcontinent 15.4 39.8 55.2
Southwest 26.5 46.1 72.6
Rocky Mountain 0.7 37.4 38.1
West Coast 0.0 12.2 12.2
Coalbed Methane 18.6 122.2 140.8
Northeast 2.5 4.1 6.5
Gulf Coast 1.3 2.2 3.5
Midcontinent 0.7 38.3 38.9
Southwest 0.5 5.8 6.2
Rocky Mountain 13.6 61.6 75.2
West Coast 0.0 10.3 10.3
Other 63.0 223.5 286.5
Northeast 7.0 29.2 36.2
Gulf Coast 10.9 101.2 112.0
Midcontinent 20.3 26.5 46.8 
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Southwest 16.9 18.6 35.5
Rocky Mountain 7.3 35.0 42.3
West Coast 0.6 13.1 13.7
Lower 48 Onshore
Associated-Dissolved
Gas
18.4 146.2 164.6
Northeast 0.4 0.6 0.9
Gulf Coast 1.7 23.9 25.6
Midcontinent 1.7 12.3 14.0
Southwest 8.3 40.4 48.7
Rocky Mountain 4.1 45.9 50.0
West Coast 2.1 23.2 25.3
Lower 48 Offshore 15.0 262.6 277.6
Gulf (currently
available)
14.2 218.4 232.5
Eastern/Central Gulf
(unavailable until
2022)
0.0 21.5 21.5
Pacific 0.8 10.4 11.2
Atlantic 0.0 12.4 12