Oil vs. Natural Gas

While oil and natural gas have both seen sharp drops since early July, the declines in gas have been twice as severe.  Since its high in early July, natural gas has declined by 33%, while oil has declined by a more modest 16.2%.  As a result, the ratio between the prices of oil and natural gas has risen back near its highs of recent years. 

Based on their relationship since 1990, the average ratio between the two commodities has been 9.2, which is 33% below current levels.  While the two commodities are not completely fungible, this would imply that either oil still has further to fall or else the sell-off in natural gas has been overdone.

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Comments

[Get real!]

Oil prices haven't fallen as much as natural gas because oil still has geopolitical risk, which natural gas doesn't have. Oil supplies face risk of disruption by violence in Nigeria, Iraq, and the ever present saber-rattling between the U.S. and Iran, and the war of words between Bush and Venezuela's Chavez.
If Israel or George Bush bomb Iran, then Iran can cut off 40% of the world's oil flow by blocking the Strait of Hormuz, and we'll see $300 oil. If McCain becomes president, he's even more likely than Bush to "Bomb bomb bom, bomb bomb Iran," as he has sung about himself!
On the other hand, most of the natural gas used in the U.S., comes from North America (USA, Canada, Mexico), which avoids the geopolitcal risk that oil has.

[Malkiel]

In the event of a severe oil price shock portions of the market will convert to natural gas or propane and compete for those fuels in the market, driving up their prices also. Nobody should believe that having any kind of gas appliances or heating system will save them from oil price shocks or availability problems. All of these fuels are part of the same fossil fuels production complex and the only safety lies in creating alternative energy technologies not based on fossil fuels...

[mangolfer]

Oil has always had geo-politcal risk. I'm betting that Oil will be falling more....

[CarlosSlim]

"Oil vs. Natural Gas"

False dilemma
From Wikipedia:

"The informal fallacy of false dilemma (also called false dichotomy, the either-or fallacy, or bifurcation) involves a situation in which only two alternatives are considered, when in fact there are other options..."

[you_can_call_me_Al]

If the very recent natural gas discoveries are to be believed, then a substitute for oil has been found (too lazy to go get the link, google CNBC's website and look for the vid on the front page). Not nearly as energy dense as gasoline, but abundant (again, if they're to be believed).

If there's a grain of truth to this, then oil must inevitably decline.