Chart of the Year – Oil prices return to natural gas linkage

Oil markets


WTI v natgas Dec15

Last year’s ‘Chart of the Year’ was headlined “China’s auto sales bubble begins to burst“.  Few would disagree with this view today.  Similarly, there is little doubt about 2015’s Chart of the Year.  It has been the focus of industry and analyst attention all year:

  • Those who believed that argument that the world faces an energy supply glut have used it to argue that WTI oil and US natural gas prices were now realigning again
  • Those who decided to invest $150bn of petrochemical industry capital in new gas-based  production, or $1.2tn of their investors’ money in new US energy production, have watched with mounting horror

It shows WTI prices divided by 6 (blue line) to equate to oil’s energy equivalent value versus natural gas (red).  And it highlights oil’s roller-coaster ride since 2009.  Contrary to all logic, oil prices surged from 2009 – 2013, ending far about their relative value versus natgas:

  • But since 2009, there has never been any risk of a shortage of oil, despite the constant analyst forecasts that this was “just  around the corner”
  • The higher prices were instead due to financial players seeking a ‘store of value‘ for US$-based assets, in response to their belief that the US Federal Reserve’s easy money policy would devalue the US$
  • Even China’s stimulus policy failed to create shortages, although it supported the wishful thinking that oil demand was set for long-term increase

But then reality began to return, as the Great Unwinding of stimulus policy began to have its effect from August 2014.

In a perfect world, prices would have simply returned very quickly to their natural level in relation to natural gas.  But as I warned a year ago, it has been a very bumpy road:

  • The problem is that central banks have been destroying markets’ primary role – of price discovery – for 15 years: first with the subprime bubble, and then with Quantitative Easing
  • And so anyone who began work within the past 15 years, has only known a world where market forces could be overwhelmed by central bank stimulus.

This is why the chart of WTI prices versus US natgas prices is so important.  It reminds us there is is a real world out there, where consumers will not continue to pay more for oil than its relative energy value.  And the oil price downturn since August 2014 also reminds us a new era is likely dawning in energy supply itself.

It seems more and more likely that oil, like coal, will end up being left in the ground.  US WTI prices were only decontrolled in 1981 under President Reagan, having previously been set by the Texas Railroad Commission (whose system of “prorating” provided the basis for OPEC’s operation).  Now it seems OPEC’s role is following the Railroad Commission into history.

Saudi Arabia and the GCC countries have recognised this for some time – and it will likely become more apparent to others in 2016 as we move into the New Normal world.

My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Brent crude oil, down 65%
Naphtha Europe, down 55%. “OPEC’s new Oil Product Outlook suggests naphtha with be the fastest growing oil product with an average growth of 1.3% per year between 2014 and 2040”
Benzene Europe, down 58%. “The key global development for benzene supply is the new capacity coming online in both India and the Middle East”
PTA China, down 44%. “Chinese demand for polyester end-products and PTA is likely to remain bearish.”
HDPE US export, down 37%. “Ample supplies with little trading activity”
¥:$, down 18%
S&P 500 stock market index, up 5%


US, Iran to sell oil in January as Libya ramps up volumes


Both the US and Iran are likely to be moving oil into world markets early in the...

Learn more

The blog in 2015


2015 was the year when companies and markets began to feel the impact of the Gre...

Learn more
More posts
OPEC+ faces difficult decisions as Covid returns, recession risks rise, and oil prices crash

OPEC+ oil producers saw prices tumble $10/bbl (13%) on Friday as the world woke up to the fact that ...

Oil markets enter the endgame as car companies rush to electrify

Almost every day now sees a car company rushing to announce its plans to boost Electric Vehicle (EV)...

Friends of the Earth v Royal Dutch Shell – what did the Dutch Court rule, and what does it mean for Shell’s business?

My Dutch colleague, Daniël de Blocq van Scheltinga, is a graduate of Leiden University in the Nethe...

Oil markets, OPEC, enter the endgame for the Age of Oil

2 major events shocked oil markets last week. They marked the start of (a) the endgame for the Age o...

Iran highlights OPEC’s dilemma on output cuts

Saying you “won’t do something” may stop you digging a bigger hole for yourself. B...

Oil prices start to reconnect with coal and gas

Oil prices are finally starting to reconnect with other fossil fuel prices, as the chart shows.  It...

Oil markets hit perfect storm as coronavirus cuts demand

Former Saudi Oil Minister Sheikh Yamani’s warning in 2000 looks increasingly prophetic today: ...

Oil markets hold their ‘flag shape’ for the moment, as recession risks mount

Oil markets can’t quite make up their mind as to what they want to do, as the chart confirms. ...


Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more


Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more