Oil and natural gas: The tango continues


Something's got to give regarding the price disparity between oil and natural gas.

Natural gas, although off its lows for the year, is still cheap at about $4.85 per million Btus (MMBtu), largely due to record stock piles, as a result of the U.S. recession and probable increased reserves in the years ahead, stemming from shale gas.

Oil, meanwhile, has been trending north, toward $80 per barrel, despite high inventories. Oil is up largely due to: 1) the belief that global oil demand will accelerate on the U.S./global recoveries strengthen, and 2) the institutional investors' practice of bidding-up the price of oil as the dollar weakens and crude's use as a asset play.

Hence, oil and natural gas, which compete with each other but which do not have identical customers or uses, are currently orbiting in different solar systems. Oil is now about 16.3 times the price of natural gas, compared to a historical average of about 8.4 times natural gas over the past decade, and that means something's got to give. The disparity will be reconciled, later if not sooner. But will it involve a slide in oil, a price rise in natural gas, or a combination?

Assuming that the U.S./global recoveries will continue to strengthen, the bias here sides with a rise in the price of natural gas. Oil prices may moderate some, but cyclical and seasonal (winter heating) bode well for natural gas short-term, and that should push natural gas higher over the next six months. Longer-term, or after Q2 2010, we'll have to see how much more natural gas supply will be available as a result of shale gas exploration, before calculating where natural gas goes from there.

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