Oil ticked over $75 today. Long time readers know I have long been bullish on Energy, Oil, and the Agricultural sectors. But what happens when some of the components within a strong sector start to diverge from each other?
Michael Panzner sends along this interesting comparison between natural Gas and Crude Oil. Typically, there is a normal ratio between the two.
In recent months, crude oil and natural gas traced out a pattern similar to what happened last year: the former rallied to new highs, while the latter drifted to new lows. Months later, the divergence corrected itself, with oil dropping precipitously and natural gas having a modest bounce.
So which is it . . . ?
2 cents….
Nat gas oversold, perhaps reflecting weakening industrial demand coupled with the continuing lack of LNG facilities in Gulf Coast that would allow greater export of US LNG. Crude oil overbought reflecting continuing demand from BRIC and the never-ending geopolitical risk premium.
Bottom line? Long UNG as a relative value/reversion to mean play and hope for a cold winter and a cat. 5 hurricane?
though Nov 2008 is far away, it is reasonable to assume that there is an ever increasing probability that Jan 2009 will see a Democratic House + Democratic White House + possible Republican filibuster-proof Senate.
Who knows what energy policy would be like in Jan 2009….something to consider as the year rolls on.
Demand for both will continue to increase as economys of China and India continue to grow.
Who knows…
Just go long UNG and short USO on a dollar nuke basis.
Ok lets see in the summer people drive more and use less nat.gas for heating,
In the winter we drive less and use more nat. gas for heating.
What season is this in the USA? Which seasons come after this one?
Notwithstanding what others have said which I agree with, am I missing something?
alexd
PS How much of a factor is lng at this point? Compared to crude.
FADEL GHEIT, OIL ANALYST, OPPENHEIMER & CO:
“There is no shortage of anything. There is no shortage of crude oil. There is no shortage of natural gas, refined product.”
NBR Transcript
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Long-term, natural gas should be more volatile and upward-trending than oil, with Russia continuing its 2-pronged assault on 1) aligning itself, Qatar, and Iran as an Evil Axis/Unholy Trinity/Sinister Triumvirate of suppliers, which will be far easier to act as one than is the case with OPEC since there’s only 3 of them and one of them can crush the other 2 if they break ranks (God help us all if Qatar joins the Dark Side, or to be more 2007, the Dark Lord’s forces), and 2) Russia’s ongoing pressure and infrastructure tactics to force Europe’s reliance on Russian natural gas.
COT report from July 10 shows commercial traders are short more contracts now than any other time since before 2003. Expect a correction in oil to rival that from last summer. Expect just the opposite from nat. gas. Commercials are longer now than almost any other time in the past 4 yrs.
It’s simply not true that “typically, there is a normal ratio between the two.” Only 5% – 10% of industrial users can switch between the two, but this is not enough to ensure that there is anything approaching a normal ratio. At some point, if NatGas falls too much, then there would be support from power plants switching from Coal to NatGas, but this would be much lower. FYI, if current NatGas storage injection trends continue, then we could reach full storage capacity! Oct06 NatGas traded as low as 4.10 on settlement day last year so don’t think we’re at a botttom.
Does it Matter? short oil and long gas and wait for them to revert to mean :)
“So which is it . . . ?”
As soon as Hank Paulson returns my call I’ll let you know.
when oil starts back down, reverting to the mean, the stock markets wil explode upward. cover the shorts
It looks like the summer driving season has its way with oil (peaks in June?). Winter has its way with natural gas.
Ummm… something is wrong with those graphs.
They should either be logarithmic, or on properly proportional axes.
Notice that natrual gas ranges by 3x from 5-15, while oil only ranges 1.5x from 50-77.
I mean, there’s some level of (anti-)correlation here, but blowing up graphs like this I could make a 500-basis move in AAA bonds look like the cliffs of Dover… or some other bright white rubble? Sorry Michael, this is less convincing than most.
maybe forget natgas and look to crude/gasoline spreads.
OT:
More containment of the U. S, housing market decline reported from Australia…
“SYDNEY, July 17 (Reuters) – Ratings agency Standard and Poor’s said it will talk on Wednesday with Australian hedge fund Basis Capital about losses at two of its funds and how Basis is dealing with turmoil in the structured credit markets.”
“Basis suspended withdrawals from its flagship Basis Aust-Rim Diversified Fund, days after informing investors that the investment house had been swept up in the U.S. sub-prime mortgage crisis, according to a report in the Australian Financial Review.”
http://au.biz.yahoo.com/070717/19/1bfi1.html
Econolicious
Pretty hard to believe the oil market isn’t a manipulated mess-by-organized-crime, just like natural gas was and the CDO market is.
Wonder what would happen if margin requirements were raised as the price was rocketed up. I bet oil would be <60.
Another problem with comparing the NatGas Crude spread is that you are looking at the front month contracts. The term structure for NatGas *always* prices in a significant jump in prices from summer into winter so, whereas front month NatGas trades at 6.54 at the moment, Jan08 trades at 8.83. You are comparing apples and oranges if you are simply looking at front month contracts for both markets.
We have reached “Peak Conventional Oil’ at the very least.
I don’t see crude coming down much from here but I do see nat. gas longer term rallying significantly.
The whole green push creates massive demand for nat. gas plants.
Listen to the GE conference call – nat gas demand will only expand from here as the supply in North America continues to dwindle.
nathan, not to argue but if you are taking the price of ‘paper barrels’ as indicative of ‘peak oil’, even matt simmons understood that not to be the case.
regards
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I live in the Texas of Canada,the province of Alberta. Theres a saying around here:the best cure for low natural gas prices, is low natural gas prices.
when prices tank companies stop drilling.this eventually leads to strong supply-side fundamentals.
Even though we are experiencing a bit of a storage overhang I believe those fundamentals will come into play soon.
I too am long term bullish on energy, Civilization needs it to survive. Globally civilizations are getting larger everyday.
Oh yeah…Great Blog