Oil and natural gas: The tango continues

Posted Oct 20th 2009 1:00PM by Joseph Lazzaro
Filed under: Commodities, Oil

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.

Tags: natural gas prices, oil prices, shale gas

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Reader Comments (Page 1 of 1)

10-20-2009 @ 1:28PM

Iridium said...

Typical Lazzaro. Wanting the price of Natural Gas to rise along with everything else.

$4.85 is already high enough. In the current environment natural gas should be around $2.85. The price has already almost doubled from the support of a supply and demand model.

Oil is just insane. Oil went from $35 to $65 based on nothing but the speculation of an economic recovery in the 3rd and 4th quarter with a huge jump in oil consumption. Six months came and went without a single uptick in consumption and the greatest rise in inventory during recent history. Yet oil did not go back down, it continued to go up.

Now we have hit $80 based on the speculation of an even greater recovery than what was thought previously.

HEY MORONS, IF YOU SPECULATED THE PRICE HIGHER BECAUSE OF A RECOVERY SHOULDN'T THE PRICE STAY LEVEL DURING THE RECOVERY BECAUSE YOU ALREADY PRICED IT IN!!!

Instead the price keeps going up because it has nothing to do with supply and demand or pricing in a recovery. It is all greed based manipulation.

How dare you actually put forth the notion that natural gas prices should rise just because oil is more expensive. What sense does that make. If you have so much money I think you should pay for everyone's heating bill this winter since you want the price of gas to rise.

I'll call Dominion and say, "Send my bill to Mr. Joseph Lazzaro. He said he'd pay for it because he thinks the trading market should charge a lot more for natural gas just because."

Oil should still be under $25 and natural gas should still be under $3. Anything higher is the premium added by the domestic terrorist manipulators.

The entire purpose of trading commodities on the open market was to prevent manipulation. To prevent suppliers from banding together to control the price. Never in Exxon's wildest dreams could they think they would be able to manipulate the price of oil 5 times the historical average without the government stepping in.

The purpose of the commodities market has been perverted into this new system where market traders bid the price up hundreds of percent to enrich themselves and never even take delivery of the product they buy. Then the same contract gets sold hundreds of times before it finally gets to the consumer.

If we traded ground meat like we trade oil the actual production cost of a pound of hamburger under a dollar would result in a consumer price of $40 a pound at the grocery store. Maybe you should think of that before you try to rationalize support for the price of oil and natural gas.