Despite the conventional wisdom that there has been a decouplingof natural gas and crude oil prices, ICF Consulting says it isprimarily the close tie between the two commodities under thecurrent circumstances that has been responsible for high naturalgas prices this year.

Many observers have incorrectly blamed high gas prices on lownatural gas supply deliverability, growth in natural gas demand inthe power sector, and low levels of injection of natural gas intostorage, ICF said. Analysis of market dynamics, however, shows therecent increase in natural gas prices is primarily a result of highoil prices. ICF Consulting has used its proprietary North AmericanNatural Gas Analysis System (NANGAS) to determine that oil and gasprices decouple when excess gas supply exists and oil prices arelow. In that scenario, the gas market is driven by gas-on-gascompetition, with gas prices at the burnertip below parity withpetroleum prices. Today, the situation is the opposite, ICF noted.Oil prices are high and gas supplies are tight. As a result, oiland gas prices at the burnertip are near parity and have againbecome coupled. Observers under-emphasize the degree to whichprices are set on the margin. Even slightly increased demand forgas resulting from users switching from oil to natural gas raisesnatural gas prices.

As a result of this recoupling, any successful efforts to reducepetroleum prices would also have the beneficial effect of loweringnatural gas prices, ICF said. However, the release of 30 millionbbl of oil from the Strategic Petroleum Reserve by the ClintonAdministration will barely send a ripple through the energy market.”This amounts to only about 0.5 million barrels a day when dailyU.S. demand is about 20 million barrels per day,” the groupnoted… “Significantly stronger measures are necessary if theintent is to dramatically lower oil prices.” ICF said utilizingmore of the SPR would do the trick but that plan likely would facestiff opposition in Congress.

“It would take somewhere in the range of 2 to 3 million barrelsa day for a month or more to reduce crude oil prices from currentlevels of more than $30 per barrel to a more stable level of $20 to$25 per barrel. Then, natural gas prices would only be about 20%higher than last year for homes heating with gas,” said ICFConsulting.

For more information on this topic, contact Michael Godec,director of ICF Consulting’s natural gas practice at 703-934-3869;For additional information, visit the firm’s web site at

Rocco Canonica

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