Best of the Week
Most Popular
1.Are UK Savings Interest Rates Finally Starting to Rise? Best Cash ISA 2017 - Nadeem_Walayat
2.Inflation Tsunami - Supermarkets, Retail Sector Crisis 2017, EU Suicide and Burning Stocks - Nadeem_Walayat
3.Big Moves in the World Stock Markets - Big Bases - Rambus_Chartology
4.The Next Financial Implosion Is Not Going To Be About The Banks! - Gordon_T_Long
5.Why EU BrExit Single Market Access Hard line is European Union Committing Suicide - Nadeem_Walayat
6.Trump Ramps Up US Military Debt Spending In Preparations for China War - Nadeem_Walayat
7.Watch What Happens When Silver Price Hits $26...  - MoneyMetals
8.Stock Market Fake Risk, Fake Return? Market Crash? - 2nd Mar 17 - Axel_Merk
9.Global Inflation Surges, Central Banks Losing Control and Triggered the Wage Price Spiral? - Nadeem_Walayat
10.Why Gold Will Boom In 2017 - James Burgess
Last 7 days
Political Week Presurres US Stock Market - 25th Mar 17
London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - 25th Mar 17
Will Washington Risk WW3 to Block an Emerging EU-Russia Superstate - 25th Mar 17
Unaccountable Military Industrial Complex Is Destroying America and the Rest Of The World Too - 25th Mar 17
Silver Mining Stock Fundamentals - 24th Mar 17
A Walk Down the Dark Road of Bad Government - 24th Mar 17
Is Stock Market Flash Crash Postponed Until Monday? - 24th Mar 17
Stock Market Bubble and Gold - 24th Mar 17
Maps Of Past Empires That Can Tell Us About The Future - 24th Mar 17
SNP Independent Scotland's Destiny With Economic Catastrophe, the English Subsidy - IndyRef2 - 24th Mar 17
Stock Market VIX Cycles Set To Explode March/April 2017 – Part II - 23rd Mar 17
Is Now a Good Time to Invest in the US Housing Market? - 23rd Mar 17
The Stock Market Is a Present-Day Version of Pavlov’s Dog - 23rd Mar 17
US Budget - There’s Almost Nothing Left To Cut - 23rd Mar 17
Stock Market Upward Reversal Or Just Quick Rebound Before Another Leg Down? - 23rd Mar 17
Trends to Look Out For as a Modern-day Landlord - 23rd Mar 17
Here’s Why Interstate Health Insurance Won’t Fix Obamacare / Trumpcare - 23rd Mar 17
China’s Biggest Limitations Determine the Future of East Asia - 23rd Mar 17
This is About So Much More Than Trump and Brexit - 23rd Mar 17
Trump Stock Market Rally Over? 20% Bear Drop By Mid Summer? - 22nd Mar 17
Trump Added $3 Trillion in Wealth to Stock Market Participants - 22nd Mar 17
What's Next for the US Dollar, Gold and Stocks? - 22nd Mar 17
MSM Bond Market Full Nonsense Mode as ‘Trump Trades’ Unwind on Schedule - 22nd Mar 17
Peak Gold – Biggest Gold Story Not Being Reported - 22nd Mar 17
Return of Sovereign France, Europe’s Changing Landscape - 22nd Mar 17
Trump Stocks Bull Market Rolling Over? You Were Warned! - 22nd Mar 17
Stock Market Charts That Scream “This Is It” - Here’s What to Do - 22nd Mar 17
Raising the Minimum Wage Is a Jobs Killing Move - 22nd Mar 17
Potential Bottoming Patterns in Gold and Silver Precious Metals Stocks Complex... - 22nd Mar 17
UK Stagflation, Soaring Inflation CPI 2.3%, RPI 3.2%, Real 4.4% - 21st Mar 17
The Demise of the Gold and Silver Bull Run is Greatly Exaggerated - 21st Mar 17
USD Decline Continues, Pull SPX Down as well? - 21st Mar 17
Trump Watershed Budget - 21st Mar 17
How do Client Acquisition Offers Affect Businesses? - 21st Mar 17
Physical Metals Demand Plus Manipulation Suits Will Break Paper Market - 20th Mar 17
Stock Market Uncertainty Following Interest Rate Increase - Will Uptrend Continue? - 20th Mar 17
Precious Metals : Who’s in Charge ? - 20th Mar 17
Stock Market Correction Continues - 20th Mar 17
Why The Status Quo Is Under Increasing Attack By 'Populist People Power' - 20th Mar 17
Why the SNP WILL Destroy Scotland, Exit UK Single Market for EU - IndyRef2 - 19th Mar 17
Crypto Craziness: Bitcoin Plunges on Fork Concerns, Steem Skyrockets and Dash Surges Above $100 - 19th Mar 17
What ‘Ice-Nine’ Means for Your Money - 19th Mar 17
Stock Market 4 Year Cycle - 18th Mar 17

Market Oracle FREE Newsletter

Elliott Wave Trading

Crude Oil and Natural Gas Ratio Explodes to 52:1

Commodities / Crude Oil Apr 12, 2012 - 07:06 AM GMT

By: EconMatters

Commodities

Best Financial Markets Analysis ArticleThe ink on our last article is barely dry when its dire prediction actually came true 48 hours later--natural gas price dropping below $2, a level not seen in over a decade.  Henry Hub natural gas front month futures declined to $1.982 per 1,000 cubic feet (mcf) on Wed. April 11, its lowest level since January 28, 2002, when the price hit $1.91.  Meanwhile, WTI crude oil rose by $1.68 to finish at $102.70 per barrel; Brent rude increased by 30 cents to finish at $120.18.


The confluence of these price movements also brought the ratio between WTI and Henry Hub to a historical record high of 52:1 (see chart below)  while the ratio of Brent to Henry Hub is a jaw-dropping 60:1 !  (And we thought the 25:1 ratio reached back in August 2009, also a historical high at the time, was parabolic.)

Chart Source: ICIS.com

Crude oil and natural gas are both energy commodities and should logically have a high degree of correlation.  Theoretically, based on an energy equivalent basis, crude oil and natural gas prices should have a 6 to 1 ratio.   However, due to various market characteristics, the price of oil typically had traded 8-12x that of natural gas in the past 25 years or so (see chart above).  That historical pattern has started to deteriorate since 2009 primarily due to the combination of rising domestic production from unconventional shale gas depressing price levels, while geopolitical events in the MENA region (Middle East & North Africa) adding fear premium to the global crude oil prices.

Natural gas lacks the global market structure like crude oil, and tends to be regionally based thus less impacted by external sources. Oil, on the other hand, is a commodity with global demand drivers; and along with gold, trades as an inflation hedge against a weakening US Dollar.

In most of Europe and Asia, the price of natural gas/LNG is typically linked to crude oil under multiyear contracts.  So while the spike in Brent helped to boost natural gas markers elsewhere, with practically zero LNG export capacity in the U.S., not even Fed's two rounds of quantitative easing could lift the languishing Henry Hub.

The chart below illustrates just how disconnected U.S. natural gas price is vs. price levels in Asia, Europe and  Brent crude oil.    

Chart Source: Valero Corp. conference presentation, March 2012

LNG (liquefied natural gas) is a relatively new technology that some believe has the potential to transform natural gas into a true global commodity.  Unfortunately, as discussed before:

Realistically, U.S. gas cargos may have a hard time competing with other exporters such as Russia, Qatar and the up-and-comer—Australia--in the Asian and European markets due to logistic disadvantage.

For U.S. LNG exports to make economic sense, domestic gas price would need to stay low, with high enough international LNG prices, and if the LNG prices are still tied to crude oil (which could change depending on market development), then crude oil prices would have to remain elevated. 

While low prices are killing some of the natural gas producers, consumers will get a break from lower electricity costs.  Meanwhile, U.S. natural gas trading at an 87% discount to Brent crude oil price is something even the oil industry appreciates.  Valero (VLO), the world's largest independent refiner, said in a presentation this January that its refinery operations use up to 600,000 mmBtus/day of natural gas at full utilization.  Betting on "low U.S. natural Gas prices for many years to come", Valero has several hydrogen and hydrocraker projects scheduled to complete by the end of 2012 to take full advantage of the low natural gas prices.

With the prospect of domestic natural gas prices remaining low and disconnected from global oil and gas prices for foreseeable future, U.S-based manufacturers of plastics, fertilizers and other products that use natural gas as a feedstock such as Dow Chemicals (DOW), Westlake Chemical Corp. (WLK), Potash (POT) and CF Industries (CF) are set to benefit from cheap U.S. natural gas as opposed to European and Asian competitors who do not.

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2012 Copyright EconMatters - 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.


© 2005-2016 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

Catching a Falling Financial Knife