Oil and Natural Gas Divergence - Actionable?

Natural gas hasn’t followed the rally of crude oil. Even as crude oil approached $100, natural gas languished in the $7-8 range, compared to the highs of $14-16 seen in late 2005. The accompanying change shows the ratio of the price of natural gas to crude oil futures - click to enlarge:

I have used the 12-month strip as the reference prices (1/12th the front month + 1/12th the 2nd month + … + 1/12th the 12 month future) as natural gas prices can be seasonal. The chart shows that natural gas prices are probing new lows against oil prices.

A look at the Commitment of Traders data from the CFTC shows a very different kind of story. Commercial traders, who are usually thought of as the “smart money”, are excessively long natural gas and giving a bullish signal. On the other hand, the signal from the COT data for crude oil can be best described as neutral.

As a former trader I can attest that all these fundamental and sentiment signals don’t matter until they matter. Others have traded successfully on COT data but I have found them problematical as a timing tool. These conditions have persisted for several weeks. Just because these conditions are at extremes doesn’t mean that they can’t get stretched further.

In future posts I will examine other interesting divergences in the energy and energy related markets.

Comments

[Georealist]

Nat Gas has much to recommend it...an essential resource in wide use (and gaining)...more expensive to find and deliver...temporarily (I believe) high inventories...a very low risk entry point for investors. There is, also, no reason nat gas should follow oil higher. They are very different commodities serving hugely different markets. Oil, in fact could go to $60..and Nat Gas to $16 and it wouldn't shock me a bit.

[dipps]

Nat Gas appears cheap here and a cold snap could launch it to a higher and more appropriate range.

[Georealist]

Nat Gas is definitely cheap..especially if more people want more of it in the future! I don't look too much at near term factors..weather, storms, explosions...The long term case is strong enough for me..more demand, less of it..higher price.