With oil and natural gas prices going opposite directions lately, the question arises whether the commodities’ relative pricing will reverse on a long-term basis.
Waco economist Ray Perryman and Odessa oilman Kirk Edwards say the situation is fluid.
Perryman sees what’s going on in the relationship between oil and gas prices as being more about a return to a more normal pattern in the natural gas market where supply and demand are coming into better and more sustainable balance.
“The BTUs in a barrel of oil are about 6 times those in an mcf of natural gas,” he said. “It varies to some extent based on the properties of the two fuels.
“Thus if we had a pure market for ‘energy,’ that would be the expected price ratio. That almost never happens in practice.”
In essence, he said, oil and gas aren’t really substitutes for each other in the short term, though obviously both are ultimately sources of energy.
“Each fuel’s price is influenced by overall economic conditions but also by specific factors which vary,” Perryman said. “Natural gas remains a crucial fuel for electric power generation and demand for electricity is growing rapidly due in part to AI, data centers, chip manufacturing, crypto mining and other factors.
“With the recognition that conventional fuel-based generation capacity is crucial, the need for natural gas is growing, which places upward pressure on prices.”
He said the LNG market is expanding and will also support the market for natural gas, but his company’s analysis indicates that that will not be the determining factor in pricing for the foreseeable future given relative volumes.”
Referring to the construction or expansion of pipelines to the Gulf Coast, Perryman said, “We have also seen issues such as the lack of takeaway capacity in the Permian Basin depressing natural gas prices and as those issues have resolved the situation has improved.
“At the same time economic and geopolitical factors have combined to put downward pressure on oil prices. All of these factors are transitory, however, and long-term global energy needs will ultimately result in oil prices being at the levels necessary to spur the required investment.”
Edwards addressed the question if natural gas has finally become an investable commodity with Thursday’s price standing at $3.781 per thousand cubic feet or 23 percent higher than a year ago.
Boosted by the turmoil in Iran, oil was up from $60 per barrel and below to $65.55.
“With oil prices hovering in the $60s, many are asking whether natural gas has finally emerged as the more attractive, investable energy commodity looking ahead,” Edwards said. “The popular narrative is that oil is ‘weak’ while natural gas is poised for sustained strength thanks to LNG exports and the explosion in power demand from AI data centers.
“That argument sounds compelling, but history urges caution.”
He said the reason oil prices are where they are today has very little to do with supply fundamentals and almost everything to do with geopolitics.
“Oil at $60 is not an accident,” Edwards said. “It is where the current U.S. administration prefers it to be and Saudi Arabia along with OPEC has shown a willingness to accommodate that objective.
“We have seen this movie many times over the past four decades: oil prices crash, oil prices spike and almost always it is driven by deliberate OPEC action.”
He said this cycle is no different.
“The more relevant question isn’t whether oil is ‘broken’ but rather how long Saudi Arabia wants prices to remain depressed,” Edwards said. “If this policy-driven price environment persists through much of 2026, the consequences will be real with material job losses across Texas, reduced drilling activity and ultimately a decline in U.S. oil production.
“Lower prices always come with a lagging cost.”
However, he said natural gas does have a genuinely constructive outlook.
“Natural gas is clearly the primary beneficiary of the massive energy demands being created by artificial intelligence and the data center expansion in the United States,” Edwards said. “We are already hearing about plans for a 2-gigawatt natural gas-fired power plant in West Texas dedicated largely to powering this new digital infrastructure.
“That kind of demand is structural, not cyclical. Layer on top of that the maturation of U.S. LNG exports and the bull case for natural gas becomes easier to understand.”
He said Europe and Asia both remain structurally short on energy and Europe’s continued restrictions on purchasing Russian natural gas only enhance the value of U.S. LNG.
“For producers in Texas and across the country this represents a meaningful and durable demand tailwind,” Edwards said.
“Still investors should resist the temptation to declare oil ‘uninvestable.’
“Oil prices can rebound just as quickly as they fall, often with little warning, if OPEC decides to remove barrels from the market.” He said betting against that reality has proved costly time and time again.
“Natural gas may indeed be entering a more investable phase, but oil’s obituary has been written far too many times before,” Edwards said. “And history suggests it rarely stays buried for long.”
