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Oil and Natural Gas Ratio Explodes to 52:1
By EconMatters
The 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.)
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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.
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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 via 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.
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Did you answer my pop quiz???
With queen Trav gone, worker Flakmeister rolls around in royal feces, triggering the hormonal changes that will make him the next queen of the death cult. Already, you can see the changes. Decline in rationality. Increase in hostility. Soon, he will degrade further, and spew forth bile at any poster who does not display an ever increasing amount of zealotry for the death cult. After that, the cult of the idea will take full control of his brain, and his views on all other subjects will be warped to fit with his current idea, no matter how counterfactual or illogical the results may be. Already, we can see him taking on the airs of professorial authority. Unlike a real teacher, however, the queens of the death cult will brook no questions whose answers display the flaws in their thinking.
Cliffie, don't you have some research to do on Roundup? Or was it the question about whether water vapor is a forcing or a feedback in the greenhouse effect? Or was it about using Ionic liquids to "dissolve" trapped oil?
BTW, I enjoy discussions and education but I do not tolerate asshats and their endless bullshit on matters that they have no knowledge about... sort of like you... You don't want to become educated, otherwise it would show...
Flakey has an advantage over Trav, he can hide out at the oil drum and recharge.
this means we are in full recovery right? green shoots are everywhere..what a joke that the MSM says our economy is healthy again..nat gas prices tells you the truth.
"Natural gas lacks the global market structure like crude oil."
Global market structure? LOL. You mean that NG is still a free market.
The problem with the ratio is that natural gas and oil have different uses. Transportation (jet fuel included) is not driven by NG. The plastics industry uses oil more than NG. And the supply of oil is threatened with the US threatening the planet with their incessant militarism. Point is: there's a great opportunity for natural gas to offset oil use in certain applications. I would think transportation would be it.
And home heating, heating oil is a racket beyond rackets.
Oil is a commodity that is easily stored. NG not so. The world is awash in oil at the moment, but is high due to the manipulated market (fraud) and the CBs money printing. This is an outstanding indicator of market fraud on the Comex.
NG is very easily stored. Easier than oil. It can be left in place or it can be injected into formations. Nearly every metro region in the US has large underground gas storage facilities.
Kind of like Silver/Gold ratio. Nat Gas or Silver are a probably a great buy right now.
That is very superficial. Read the article again, especially the part about NG being a regional market. Silver is a global market.
Big difference. You would have to know what future production for NG is going to be, which is a very difficult question to answer, one that relies on the psychology of producers and politicians as well as geology. Silver production is pretty stable for a variety of reasons.
NG doesn't have to be a regional market. It can be turned into plastics, methanol, fertilizer, feedstocks, paraffin, etc. quite cheaply and then easily exported. Some idiots in the chemical industry need to make a few investments.
I'm eating Mexican tonight. The ratio will drop.
Deus Ex: NG Car & Station Conversions?
$250K plus land over a NG gas line to get a station up and running.
I wish.