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As oil prices top $125 and take other energy prices higher, where do oil prices go from here? Crude oil appears to be overbought in the short term but sentiment doesn’t seem to be at a bullish extreme, indicating that there may be more upside in black gold. However, oil does seem to be extended relative to other commodities.
Fast money is in a natural gas crowded short
A look at the CFTC commitment of traders data
shows two different faces of sentiment in the energy complex. While
natural gas prices are nowhere near their all-time highs, large
speculators (read: hedge funds) are showing record levels of skepticism
in natural gas and they are net short the commodity. Readings are not
only at a crowded short level but their bearish positions are off the
charts.
Hedge funds long crude but not excessively bullish yet
By
contrast, large speculators are net long crude oil but readings are not
at an extreme level despite the record oil prices. This data from the
CFTC, combined with public sentiment readings,
suggests that in the absence of excessive bullishness in crude oil, the
commodity does have room to move a bit higher given its positive price
momentum.
Buying natural gas seems less risky than buying oil right now
The
contrast in sentiment readings suggests that natural gas prices have
more upside potential than oil prices and could hold up better should
the energy complex correct. The chart below shows the price ratio of
natural gas to crude oil, along with its long-term average and the one
standard deviation bands around the average. I highlighted the price
divergence between these two commodities in December and again in February. The natgas/oil ratio bottomed out in late December and has since turned up but likely has more to go.
A long natural gas/short crude oil position would have a potential upside of 15% today, based on the conservative target of reaching the lower one standard deviation band. If we assumed that the ratio moved up to its long term average, the position would have a profit potential of 50%.
Oil looks extended against gold too
Another
way to look at oil is to look at its performance against gold. The
chart below shows the price ratio of gold to oil since 2000. Gold
prices topped out against oil prices in late December 2007 and the
ratio reversed itself dramatically. Oil now appears quite extended
relative to gold, as it does against natural gas.
The commitment of traders report on gold (not shown) shows that sentiment readings are relatively neutral. As a result, I would prefer a long natural gas/short oil trade rather than a long gold/short oil trade.
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This article has 7 comments:
Meanwhile, even if you use $8 per BTU, on a converted basis Nat. Gas would be fairly valued at $15.
Meanwhile, Opec has reiterated that it will not reconvene until September...could it possibly be that they do not have any spare capacity currently?
No one knows how much they are using internally.
Oil is off to the races until we rein in our consumption or find an alternative to replace it...
Is there a correlation between natgas and crude prices? maybe, but it could have more to do with the fact that the industry's that produce them share cost increases (labor, taxes, equipment and suppliers).
From this you conclude that because they are aggressively short that prices must rise? I think I'll stick with what the fast money is doing based on their track record. Trading is a zero sum game and someone else is equally as long - likely those with a worse track record.
John Arnold is one of those traders. He made over a billion in bonus when he blew Amaranth and Brian Hunter up because he was on the other side of the trade. Fast money is fast money for a reason and I wouldn't be standing in front of them on the off chance that they are wrong this time.
PUMP PEOPLE
I tell you when the oil producers decide they made enough money they will pump more oil and the price will drop like hot lead into butter. The North Sea stopped the 70's fake oil shortage. OPEC stopped IRAQI one from high oil prices. Clinton stopped OPEC from rising prices just before he got out of office and just by threating to release oil reserves. Russia, The North Sea, USA, Chile, Nigeria and the Middle East are holding back while oil prices keep rising. The alternative fuel that will stop it all Hydrogen the most abundant substance in the universe is at our doorstep. The oil whores know it and are charging all they can while they can.