The Connection Between Oil and Natural Gas

Oil and natural gas may be different commodities, but share key similarities. This article explores the connection between oil and natural gas and why this is important to traders and investors.

TL;DR

• Natural gas and oil industries include exploration, production, processing, transportation, storage, and distribution companies. Many serve both sectors.
• Oil and gas come from ancient seabeds turned into fossil fuels. Fracking (introduced in 2006) allows horizontal drilling to release trapped gas.
• Factors like geopolitical tensions, global supply and demand dynamics, OPEC & non-OPEC production decisions, technological advances like fracking, economic cycles, energy consumption, refining, transport, and government taxes can affect oil and natural gas prices.
• Once closely linked, natural gas and oil prices often move independently due to fracking and shifting consumer demand.
• Natural gas has evolved from a byproduct to a preferred, cleaner energy source. It's now actively traded independently, with growing appeal among CFD traders.

What Do the Oil and Natural Gas Industries Consist Of?

The natural gas industry comprises different factions of companies serving other parts of the supply chain. Since oil is an older industry, many companies in the natural gas ecosystem offer their services to both sectors.

• Exploration Companies: Companies that survey land and determine locations likely to be rich in natural gas and Oil.
• Producers: Companies that purchase mineral rights, drill wells, and extract natural gas or oil from the ground.
• Natural Gas Processors: Industrial processes that clean the gas to remove water, heavy carbons, helium, and other chemicals to ensure it meets natural gas's purity standards before pumping it into a midstream line.
• Mid-Stream and Transmission Transporters: Pipeline owners who charge Producers for the use of their transmission lines.
• Storage Operators: Storage facilities lease space to gas owners to store gas before sending it to consumers.
• Local Distribution Companies: LDCs manage gas delivery from the storage facilities to end consumers. They also charge the gas owners for using their lines without owning the gas itself.

Where Are Natural Gas and Oil Found?

Natural gas and oil can both be found in underground deposits that were once active bodies of water. After drying millions of years ago, these dry beds left behind fossils, plants, and other debris, which were covered with dirt and compressed for years. Combined with the heat of the earth, they became oil or natural gas, often trapped within the rock formations surrounding them.

How Are Oil and Natural Gas Extracted?

In 2006, companies began drilling down a few kilometers into the ground and then turned 90 degrees to drill horizontally into shale or limestone deposits where oil and gas were trapped. A mix of chemicals and water was then pumped into the rocks at high pressure, creating fractures in the rocks and releasing the oil and gas trapped within. The fracturing of rocks has led to this extraction technique being referred to as "fracking".

The well produces a mix of water, oil, natural gas, and other elements trapped within the rocks and deposits.

This technological advancement encouraged increased natural gas extraction, distinguishing it as an independent commodity from oil.

What Affects Oil and Natural Gas Prices

• Global Supply & Demand:
  The balance between global production and consumption heavily influences CL and NG prices. When production rises but demand stays flat, prices tend to fall. Conversely, supply disruptions, due to conflicts or production limits, can cause prices to spike.
• Geopolitical Instability:
  Tensions, wars, and sanctions in key oil and natural gas-producing regions (like the Middle East or between Russia and Ukraine) can limit supply and lead to sharp price fluctuations in the global market.
• OPEC & Allied Production Decisions:
  OPEC and its partners play a key role in setting output levels. Their decisions to cut or increase production can shift global prices, although rising output from non-OPEC countries (like U.S. shale producers) can offset their influence.
• Technological Innovation:
  Breakthroughs such as fracking and horizontal drilling have unlocked new reserves, especially in the United States. This increased supply often puts downward pressure on global oil and natural gas prices.
• Economic Activity:
  When economies are strong and growing, energy demand rises, increasing oil and natural gas prices. Reduced demand typically drives prices lower during downturns or recessions.
• Refining, Transport, & Taxation:
  The cost of refining crude oil and natural gas into usable products, transporting it to consumers, and applying government taxes all factor into the final retail price of oil-based products like gasoline.

Do the Prices of Oil and Natural Gas Rise and Fall Together?

Understanding the fluctuations of natural gas in relation to oil means recognising the relationship between supply, demand, and capital allocation.

Traditionally, natural gas and oil prices moved together, but since 2006, when new drilling practices were introduced, natural gas has become recognised as a stand-alone commodity. Industrial consumers, who used to rely mostly on coal or oil, can now turn to natural gas as an energy source that can power factories and produce electricity.

Energy consumers who can switch between oil and natural gas as needed are more likely to select the commodity that is cheaper to operate. For example, they may choose oil in the winter when natural gas is in demand for home heating, then switch to natural gas in the summer when demand drops.

While oil and natural gas prices once rose and fell relatively in sync, new drilling practices and consumer demands have increasingly shown traders that they are no longer connected. Traders, who now view these as two commodities that are independent of one another, can trade CFDs to take advantage of the inherent volatility of these energy-rich fuels.

Natural Gas Price Chart vs. Crude Oil Price Chart

The combined price trends of Natural Gas and Crude Oil from January 2020 to mid-2025 highlight how major geopolitical events have shaped global energy markets. Crude oil prices collapsed in early 2020 during the COVID-19 pandemic, then surged per barrel in 2022 following the Russia-Ukraine war, which triggered widespread supply disruptions. Prices later stabilised around the $70–$80 range. Natural gas remained subdued until late 2021, then spiked dramatically, peaking in mid-2022, as the war in Ukraine intensified Europe's energy crisis. In 2024 and 2025, the market saw renewed volatility amid escalating Iran-Israel tensions, raising concerns over Middle East oil supply routes. While natural gas prices gradually cooled, both commodities reflect the high sensitivity of energy markets to global conflict and uncertainty.

*illustrative figures

Source: Statista

Natural Gas's Commodity Evolution

Natural gas has gone from being an unwanted byproduct of oil wells to a highly sought-after commodity. Its use as a more eco-friendly alternative to oil and its lower price have made it a favourite amongst energy suppliers and end-users for power plants, home heating, cooking, and even clothes drying.

Natural gas has found a booming market among CFD traders, who view it as an independent commodity with the same readability as other competitive commodities. As time passes, natural gas and oil move further apart, creating increased volatility and a new era of energy trading.

Conclusion

Oil and natural gas industry is a complex supply chain with multiple specialised players, from exploration and extraction to processing and distribution. The evolution of fracking has unlocked vast shale deposits, allowing natural gas to emerge as a stand-alone commodity, distinct from oil. As demand grows due to its cleaner environmental profile and affordability, natural gas continues to reshape global energy markets and trading strategies. Its decoupling from oil signals a dynamic future with increased market volatility and broader applications in energy production and consumption.

*Past performance does not reflect future results.