The oil/natural gas ratio goes parabolic

Oil markets

SHARE THIS STORY

WTI v natgas Apr12.pngParabolic price movements are great fun whilst they last. The dot.com technology stock boom was a great example, when prices would jump 1% or 2% a day towards its end. And then, sadly, it all collapsed.

The NASDAQ technology index doubled in a year to reach 5000 during its final, parabolic run-up to March 2000. It then lost half its value in the next 9 months, and carried on falling until it bottomed at 1200 in July 2002.

Today, the above chart of the ratio between WTI crude oil and US natural gas prices is showing the same parabolic picture:

• Gas prices have fallen from $13.4/MMBTU in July 2009 to $2.1/MMBTU
• WTI prices have risen from $33/bbl in January 2009 to $103/bbl
• The ratio has thus almost reached 50:1

Of course, there are lots of reasons for the recent divergence in performance between natural gas and crude oil.

The dramatic rise in shale gas availability has caused gas storage problems. Users have been slow to convert from oil to take advantage of cheap gas prices. And the high-frequency traders have focused on the much larger WTI market when playing their computer games.

But fundamentally, WTI has ~6 times the energy content of natural gas. And its historical average, due to its logistic/storage advantages has been 9.9 times gas prices.

Equally, today’s sustained record oil price levels are not based on either a shortage of product, or strong demand. In fact, the reverse is true, with demand destruction taking place in all major markets.

‘Reversion to the mean’ is the most profitable investment concept. And when markets go parabolic, this is generally a good sign that the trading has become very one-sided. It then only takes a relatively minor incident to change the seemingly-unstoppable trend.

PREVIOUS POST

Markets weaken as real problems remain unsolved

09/04/2012

Parabolic price movements are great fun whilst they last. The dot.com technology...

Learn more
NEXT POST

Beijing home prices fall 21% in Q1

11/04/2012

Parabolic price movements are great fun whilst they last. The dot.com technology...

Learn more
More posts
Déjà vu all over again for oil markets as recession risks rise
03/03/2019

Back in 2015, veteran Saudi Oil Minister Ali  Naimi was very clear about Saudi’s need to adop...

Read
Oil prices flag recession risk as Iranian geopolitical tensions rise
20/05/2018

Today, we have “lies, fake news and statistics” rather than the old phrase “lies, ...

Read
Saudi oil policy risks creating perfect storm for Aramco flotation
15/04/2018

Good business strategies generally create good investments over the longer term. And so Aramco need...

Read
Economy faces slowdown as oil/commodity prices slide
12/02/2018

Oil and commodity markets long ago lost contact with the real world of supply and demand. Instead, t...

Read
Saudi Arabia’s ‘Vision 2030’ is looking a lot less clear
30/10/2017

Saudi Arabia’s U-turn to revive oil output quotas is not working and fails to address the chan...

Read
Oil market supply/demand finally begins to matter again as commodity funds withdraw
11/09/2017

Its been a long time since oil market supply/demand was based on physical barrels rather than financ...

Read
Oil heads back below $30/bbl as hedge funds give up on OPEC
10/07/2017

“Those who cannot remember the past are condemned to repeat it“. George Santayana 9 mont...

Read
Oil price weakness will unmask reflation and recovery myth
15/06/2017

Oil markets have been at the centre of the recent myth that economic recovery was finally underway. ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more