Oil / Natural Gas Ratio Still Extreme

Looks like the oil/natural gas ratio has begun correcting but is still at an extreme.

The products are not the best of substitutes, but their price movements should be correlated positively instead of negatively as has been the case recently, since they are both derivatives of economic activity.

Seems like oil traders are betting on inflation and gas traders on deflation which is an inconsistency we might be able to take advantage of.

I am looking for a long gas/short oil trade to bet on mean reversion. Suggestions?

Comments

[H. T. Love:]

For near-term, I like the short oil side. The long NG would be too early, IMO. The catalysts needed are still too far away to cause a price rise.

I'm new at this stuff, but I happen to be looking at everything I can find on the NG stuff recently. If you want to consider my thoughts (keeping in mind that I'm new and learning this stuff), I've two blogs I've been working.

This one I'm trying to finalize (again) to publish.

seekingalpha.com/insta...

This one is just my "stream of conciousness" working document.

seekingalpha.com/insta...

Again, CAUTION! nOOb AT WORK!

HardToLove

Jun 17 10:47 AM

[BDI:]

Do anybody know how we can trade this one? I have tried to do it with futures, but there is no spread in Dec10.
This trade must be done on the spot market but i don't know how to put it in place! Any suggestions will be appreciated

Jun 17 11:47 AM

[Elliott:]

I see no rational argument that oil and gas should trade together. They are two separate markets. Gas is plentiful in the U.S., oil is not. Oil can be refined into gasoline, nat gas cannot. Utilities committed to nat gas for electricity cannot easily switch to oil or vice versa. Bottom line is that the supply, demand, inventories, transportation, usage of oil and gas are so completely different that there's no reason to expect a correlation.

Jun 17 01:52 PM

[KIT:]

Old days 7 to one was normal based on rough BTU equvilency and the old balance of availability.

Today no one needs natgas and shale has increased availability.

Oil is not needed right now either but has become a replacement for gold as USD safe ground. Gold can be manipilated by central banks. Oil can be manipilated by hedge funds and ETFs. The difference is Govt wants gold price down, and oil price down but make people believe the markets are ok oil has to be high.

At any rate 18 to 1 may be the new normal the economy will have to return to normal to use the natgas and if that happens the oil price will rise. Probably in lock step.

We need diasters to limit natgas availabiity

Both are related to the USD and will move with it up or down so thats neutral.

Jun 17 04:21 PM

[HardwoodFlo...:]

Sorry but Nat Gas, because it is so dependent on national/regional use, won't go up until industrial production returns. Part of the reason is the amount of Nat Gas used in electricity production is way down because industrial production is down.

On oil:

Raise the margin requirement on commodities- from 10% to 30% and watch the cockroaches head for the exits. as it stands right now the downside loss potential is only 10%- the fund just declares bankruptcy with a 10% loss if the "bet" goes the wronge way. I'm sorry I mean investment not "bet".

Also, there were two guys from Stanford who did an anlysis of the oil market last fall. They proved that with just $10B you could control the price of world wide oil.

So the $8 billion in Commodity ETFs that has come BACK to the market in the last little bit has had no barring? (you should see the graph of money going into Commodity ETFs and overlay that over oil- it's the exact mirror both up and down). No, it's probably as you assert the fact that the fundementals of oil are determining the price.

So, wow, I guess it must be the hurricane season or the "summer" driving season, or political instability or what ever chaos theory suits/rules the day.

I do have one question: what is up with the SOR? Is is a reserve or a drain. I cannot believe they are still putting oil in that thing. They wouldn't be buying oil, using the reserve, to create political stability for Russia and Saudi would they?

It's the same trade as last summer: bid the dollar down, bid commodities up (this in turn will raise input costs to companies and squeeze the consumer) then short stocks because the raising input costs will not be offset by increase consumer demand. It's a terrific world the hedge funds, totally unregulated, have created for themselves- being a pariah on the consumer. I'm so glad they are unregulated! I'm also glad they aren't speculators but, instead, greedy disgusting little pin heads who create and add no value at all. At least they will be able to afford their rentals in South Hampton, Nantucket and Newport this summer.

Jun 17 04:57 PM

[Alamo:]

I completely agree that the crude/natural gas ratio is far "out of balance".

That imbalance will likely tighten in the reasonably near future due to pending federal legislation currently winding its way through Congress.

Another major impact will come from the significant environmental advantage that natural gas has over the vastly more polluting gasoline and diesel fuels derived from crude oil.

As gasoline pump prices continue their upward climb, Americans will demand Congressional action and natural gas wins that battle. Barack Obama has indicated that he favors utilization of natural gas in the transportation sector. With re-fueling facilities in place and Detroit's head still vibrating from their recent melt down, I look for them to begin building NGVs by the millions. Corporate truck fleets are either converting to CNG (ie, AT&T) or seriously studying the conversion process (ie, Wal-Mart,etc). Municipal bus fleets in progressive cities across America are fueled with CNG as a ready means to cleaner air quality. I see the pressure to clean up the air in all cities to continue the move toward CNG vehicles (taxicabs, city delivery vehicles, sanitation depts, fire and police depts, ambulances, etc) materially increasing in the near term.

Virtually every American considers himself to be an environmentalist---so long as it doesn't cost much. CNG vehicles are environmentally positive and won't cost much more with the subsidies likely to be available.

The gas to oil price disparity seems certain to equalize in the next 24 to 36 months and the sooner, the better.

Jun 17 05:25 PM