Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Correct into Bitcoin Happy Thanks Halving - Earnings Season Buying Opps - 4th July 24
24 Hours Until Clown Rishi Sunak is Booted Out of Number 10 - UIK General Election 2024 - 4th July 24
Clown Rishi Delivers Tory Election Bloodbath, Labour 400+ Seat Landslide - 1st July 24
Bitcoin Happy Thanks Halving - Crypto's Exist Strategy - 30th June 24
Is a China-Taiwan Conflict Likely? Watch the Region's Stock Market Indexes - 30th June 24
Gold Mining Stocks Record Quarter - 30th June 24
Could Low PCE Inflation Take Gold to the Moon? - 30th June 24
UK General Election 2024 Result Forecast - 26th June 24
AI Stocks Portfolio Accumulate and Distribute - 26th June 24
Gold Stocks Reloading - 26th June 24
Gold Price Completely Unsurprising Reversal and Next Steps - 26th June 24
Inflation – How It Started And Where We Are Now - 26th June 24
Can Stock Market Bad Breadth Be Good? - 26th June 24
How to Capitalise on the Robots - 20th June 24
Bitcoin, Gold, and Copper Paint a Coherent Picture - 20th June 24
Why a Dow Stock Market Peak Will Boost Silver - 20th June 24
QI Group: Leading With Integrity and Impactful Initiatives - 20th June 24
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Crude Oil vs. Natural Gas, Which One is Wrong?

Commodities / Crude Oil Jun 09, 2011 - 06:41 AM GMT

By: Willem_Weytjens

Commodities

Best Financial Markets Analysis ArticleWhen we have a look at Oil prices and Natural Gas Prices, we can see that both prices were highly correlated since at least 1994 until early 2009 (with 1 exception in 2001):


Chart courtesy stockcharts.com

However, the correlation broke down early 2009, when Oil started to rise, while Natural Gas remained very weak.
Oil set higher highs in 2010-2011, while Natural Gas set lower highs.

Since the correlation seems to be so high, we should see a relatively stable ratio over time, which is true:
We have a relatively stable ratio going from roughly 4 to 14, which means Oil has been trading at 4 to 14 times Natural gas prices. When the correlation broke down in 2009, this ratio shot higher to as high as 28.
The ratio is declining the last couple of weeks, but is still far above the trading range.
The long term average is around 8, while the ratio is now at 20.5, meaning Oil is too expensive relative to Natural Gas (if history is any guide).

Chart courtesy stockcharts.com

Unfortunately, the data of Stockcharts goes back to only 1994, so I looked for more data, and found data going back to 1986 at the US Energy Information Administration. (www.eia.gov)
I made some calculations in Excel, and found out that the correlation from 1986 to January 2009 between Oil and Natural Gas ws as high as 88.71%.

This is a longer term view of the monthly ratio:

We can see that the ratio is currently even higher than in 1990 during the Persian Gulf War. The historical monthly average from 1986 to today is 10.69, shown by the red line.

Supply of Natural Gas has increased due to new, cheaper technologies. When supply increases and demand remains the same, prices fall.
Oil prices have risen the last couple of years because people think the era of cheap oil is over. Costs of extracting oil increase because it becomes harder to find big oil fields, which limits supply. The Crisis in the Middle East and the surge in inflation have also helped Oil surge.
However, if the price of Oil would rise a lot, we can expect the demand to shift from Oil to the less expensive gas.Less demand for Oil and more demand for Gaswould likely reduce the price of oil and increase the price of Gas. The market should go back to an equilibrium point over the long run.

To see the Excel sheet used for these calculations and charts, please click Here

Willem Weytjens
www.profitimes.com

© 2011 Copyright Willem Weytjens - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in