US natural gas prices tumble

Energy v S&P Apr10.pngThe blog’s early career, as a petchems trader in Houston, taught it to look out for moments when prices in one market start to diverge from those of a related product. These can often provide advance warning that a trend change is underway.

Thus it is fascinated by the above chart, from commoditycharts.com. It shows US crude oil prices (black line) since December, versus the S&P 500 (red line) and natural gas (green line). Oil and the S&P 500 have continued to move together, as they have for over a year. This has been a self-supporting trade, where higher oil prices provide evidence that a strong recovery is underway, and vice versa.

But natural gas prices have clearly diverged over the past few weeks. They peaked, as normal, in December-January, but are now down 21% versus early December. And in recent weeks, oil has also begun to struggle to keep up with the S&P. It has only risen 1.5% over the period, versus a 7.75% S&P increase.

Lower prices are excellent news for US gas-based chemical producers. And they should continue to be weak. Gas inventories are currently 12% above the 5 year average, and Bloomberg suggests they could reach record levels over the summer as new supply comes online.

Of course, as the blog noted last week, oil also has poor fundamentals, with US stocks well above normal levels. But Wall Street analysts remain bullish, based on “technical” signals. So it will be interesting to see whether declining natural gas prices do now indicate a trend change.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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