Will Oil Prices Go Up Or Down – Crude oil and natural gas tend to get the most attention for traders active in the energy sector. A debate ensues over how and to what extent oil and gas prices are correlated. This paper examines the relationship between crude oil and natural gas prices.
Let’s start by setting the context with historical price observations for both assets. Below are two charts tracking the prices of Brent crude oil (an oil that provides a benchmark for world oil prices) and natural gas over the past three years.
Will Oil Prices Go Up Or Down
The chart above shows that both commodities were mostly lower in the first six months of 2017. However, from June of that year to May 2018, crude oil prices tended to move higher, while natural gas prices remained relatively flat. Both assets fell sharply in the fourth quarter of 2018, and while crude oil sales began in early October, natural gas prices did not start falling until December.
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Prices began to diverge again in 2019, with oil prices rising between January and April, while natural gas prices continued to trend lower. From June to the end of 2019, crude oil traded sideways and natural gas prices edged higher.
From the above observations, crude oil and natural gas prices show little correlation over the broader three-year review period. However, looking at other data sources can provide a different view. The U.S. Energy Information Administration (EIA) provides historical data for correlation studies between crude oil and other commodities. The table below, compiled from quarterly data, shows the correlation between changes in natural gas prices and Brent crude oil prices.
In simple terms, the correlation between two asset prices is the degree to which the price movement of one asset resembles the price movement of another asset. The correlation coefficient between crude oil and natural gas is 0.25, indicating that changes in oil prices can account for 25% of changes in natural gas prices (on average over the entire study period). Correlation is not an indicator of causality; rather, it simply shows how much similarity exists between the price patterns of two assets (both rising and falling together). We can see the following information from the above table:
From 2003 to 2008, there is a clear positive correlation between the two commodities – from 0.25 to >0.65. This positive relationship peaked in the second quarter (Q2) of 2004 and the second and third quarters of 2005, while each quarter in 2008 exhibited a relatively strong link. However, the data show little correlation between 2009 and 2020, except for irregular quarters.
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Revolutionary hydraulic fracturing and horizontal drilling have dramatically boosted U.S. shale production, offering a potential explanation for the decoupling of crude oil and natural gas prices over the past decade. Since natural gas is a regional product and oil is a global commodity, an increase in domestic production lowers the price of the commodity relative to the price of oil.
However, since oil and gas are close substitutes, periods of stronger correlations may recur. End users can now switch between fuels. For example, businesses could use power plants that can switch between oil and gas, or consumers could use dual-electric vehicles. If the price of one energy source rises significantly, consumers can choose to use another energy source. This increases the demand for the second energy source, and its price rises accordingly.
The comments above suggest that oil has been the dominant factor in any relationship observed between crude oil and natural gas prices (in other words, oil prices tend to have a greater impact on natural gas prices than the opposite).
Based on price patterns over the past decade, it is difficult to draw firm conclusions about the correlation between crude oil and natural gas prices. The U.S. is one of the few countries that appears to have a balanced infrastructure and a mature oil and gas market. However, the jury is still out on the true relationship between oil and gas as the rest of the world’s markets become more dependent on oil, with signs pointing to oil being the driving factor.
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Proposals appearing on this form are from partnerships that receive compensation. This compensation affects how and where the list is displayed. It does not include all offers available on the market. That means oil producers are paying buyers because they fear storage capacity may run out in May.
As a result, oil companies have turned to chartering tankers to store excess supply, forcing U.S. oil prices into negative territory.
The price of a barrel of West Texas Intermediate (WTI), the benchmark for U.S. oil, fell to minus $37.63 a barrel.
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“It’s crazy,” said Stewart Glickman, energy equity analyst at CFRA Research. “The demand shock is so big that it’s bigger than people expected.”
Monday’s sharp drop was partly due to technical issues in the global oil market. Oil trades at its futures price, with the May futures contract expected to expire on Tuesday. Traders are keen to offload these payments to avoid having to take oil and incur storage costs.
The June price of WTI also fell, but was trading above $20 a barrel. Meanwhile, Brent crude — the benchmark used in Europe and the rest of the world and already trading against the June contract — also weakened, falling 8.9% to less than $26 a barrel.
Mr Glickman said the historic reversal in prices was a reminder of the pressures on the oil market and warned prices could also fall in June if the shutdowns persisted. “I’m not very optimistic about the outlook for oil companies or oil prices,” he said.
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OGUK, the business lobby group for the UK offshore oil and gas industry, said negative oil prices in the US would affect companies operating in the North Sea.
OGUK boss Deirdre Michie said: “The dynamics in this U.S. market are different than those that directly drive UK-produced Brent crude, but we will not escape the impact.”
Earlier this month, OPEC members and their allies finalized a record deal to cut global production by around 10%. The agreement is the largest ever to cut oil production.
“The market quickly recognized that the OPEC+ deal in its current form was not enough to balance the oil market,” said Stephen Innes, chief global market strategist at Axicorp.
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Major exporters — allies such as OPEC and Russia — have agreed to cut output by record amounts.
In the U.S. and elsewhere, oil producers have made commercial decisions to cut output. But the world has more crude oil than it can use.
It’s not just about whether we can use it. It’s also about whether we can store it until the lockdown eases enough to create additional demand for petroleum products.
Capacity on land and sea will fill up quickly. As this process continues, the price may decrease further.
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A recovery in demand is needed to really change the market, and that will depend on how the health crisis plays out.
Supply will shrink further as private sector producers respond to low prices, but it is difficult to see this happening on a scale large enough to have a fundamental impact on the market.
For U.S. drivers, the drop in gas prices — which have fallen by about two-thirds since the start of the year — has hit gas stations, though not as sharply as Monday’s drop would suggest.
“The silver lining is that if you need to be on the road for whatever reason, you’re using a lot less gas than you were four months ago,” Mr Glickman said. “The problem for most of us is that even if you Can be filled, where are you going?”
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U.S. President Donald Trump has said the government will buy oil for the country’s national fund. But concerns are growing that U.S. storage facilities will run out of capacity, with inventories at Cushing, the main U.S. oil distribution point, up nearly 50% since early March, according to ANZ.
“It’s a dump, by all accounts, because no one, I mean no one wants to ship oil when the Cushing storage facility is filling up every minute,” Mr. Innes said. Oil prices are falling, keep falling. Back in June 2014, Brent crude was trading at $115 a barrel.
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