International Energy Agency, IEA Executive Dir. Nobuo Tanaka (AP Photo)
The price ratio between oil and natural gas has been covered here on HRN. Some analysts a few months back were pointing out the disconnect as an indication for an increase in natural gas prices. (Refresh -the long standing rule in the energy sector has been the 6:1 ratio which is based on the energy equivalent between natural gas and oil. IOW, 1 barrel of oil gets ~ 6 million BTUs of energy; 1 Mcf of natural gas gets you 1 million BTUs. Therefore, on an energy equivalent basis 6 Mcf of natural gas equals 1 barrel of oil).
Today, the International Energy Agency (“IEA”), launched their World Energy Outlook and told Reuters in an interview the oversupply of natural gas looked likely to continue in the short to medium term. Nobua Tanaka, Executive Director for the IEA stated;
“Demand for natural gas has been falling significantly, so the price of gas has been falling as well, but crude oil prices have been relatively high. Historically, the price of natural gas and oil has been linked, but this link could be broken. This could be bad news for producers but good news for consuming countries.”
The bottom line here is supply. Natural gas supplies have gone up dramatically surpassing current and projected long term demand which will stagnate natural gas prices. At the same time, the opposite is occurring with oil whereby supply is not going to keep up with forecast demand and will therefore increase in price. (The U.S. Energy Information Agency today raised its 2010 world oil demand outlook buoyed by economic turnaround in China and non-OECD countries).
To Mr. Tanaka’s statement on natural gas that “This could be bad news for producers but good news for consuming countries” further supports the opportunity for Canada and the United States to increase the use of natural gas as a long term stable and secure energy source to reduce carbon emissions. Shale gas has dramatically increased the natural gas reserves in North America making the United States and Canada major producers. Its time to move forward and increase natural gas usage in our transportation and electricity network displacing heavy carbon oil and coal.
Reuters via Globe & Mail: IEA says oil-gas price link may break
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