WTI Crude vs Natural Gas - Gas Oil Trading

Characteristics of the personal composite instrument:

• Oil and gas are partially substitutable forms of hydrocarbon fuel. The energy conversion coefficient between these two resources is constant and 1 barrel of oil is equivalent to 5.55 mln British thermal units based on this conversion rate. Thus in the long term perspective the &GAS/OIL PCI will trade in a sideways range.
• The instrument possesses minimal economic sensitivity towards fundamental events as both types of raw materials are extracted and traded in US. This makes it possible to detect low volatility movements primarily within sideways ranges.
• The US production of shale oil and gas has been rising since 2012. After partial modification the same drilling rigs can be used for extracting both oil and gas. Therefore the American mining companies can adapt the equipment at various wells. Currently they are interested in increasing the oil production. The increasing supply pushes oil prices lower while gas is rising. This happens partially due to increased seasonal demand in winter and partially - due to decreased number of drilling rigs.

Perspectives

We do not exclude the possibility of continuing downtrend in oil markets. At the same time the natural gas prices may rise as investments in natural gas extraction industry fall proportionally with increasing investments directed towards expanding oil production. In 2008 the traditional gas output in US exceeded shale gas production by a factor of 7. Wherein the shale gas production accounted only for 11% of total output of natural gas. Last year the shale gas production exceeded the traditional gas output by 6% and the shale gas production accounted for 40% of total natural gas production in US. The number of wells was increased by 10.5 thousands to substitute the conventional gas with shale gas production. Perhaps part of this equipment could be reconfigured for shale oil production.