Natural Gas/Oil Price Ratio Predicts Price Hikes

“Consumers should expect significant increases in heating bills this coming winter,” warns Bob Weir, Director of Research for eResearch.com. Writing in his firm’s latest Clarion newsletter, he says natural gas prices should “rebound to double digits” while “crude oil will trade between $100-$120/bbl over the next six months.”

The reason? In August, the ratio of the price of crude oil to natural gas climbed to 14, as gas prices fell by more than oil prices. A ratio of 10 is the norm, according to Weir. Ergo, the price of gas should be going up given oil has stabilized above $100.

Gas prices have indeed collapsed more dramatically. At the end of June, they hit a high of $13.10/mmbtu while crude oil peaked at $147.10/bbl in mid-July. As September begins, natural gas is priced at $8.24 and oil at $115.46.

In addition, natural gas prices have seasonal fluctuations due to links with air-conditioning and heating cycles. Historically, they begin rising in July and continue upward through to November, notes Weir in eResearch.com’s Clarion newsletter.

Comments

[bmaclaverty:]

It will be interesting to see what happens-- But crude isn't like most bubbles. This bubble is popping because of a global recession.... nothing like what we saw with tech and housing

Anyone see this article? In the first part the author describes why its important to watch crude prices and what this means for the economy as a whole. Pretty interesting.
www.greenfaucet.com/th...

2008 Sep 04 12:31 PM

[BrotherMaynard:]

There isn't enough switching capacity for that "rule" to be enforeced. The ratio means nothing.

Stop misleading readers.

Its perfectly conceivable if nat gas keeps tanking b/c of huge builds. Its not like we can export the stuff.

2008 Sep 04 04:28 PM

[Managing Ed...:]

A much more modest, and reliable I think, approach might be to look for seasonal trades based upon the crude oil/natural gas price relationship.

A timely example of an oil/gas spread is presented in the HardAssetsIinvestor.co... article, "Spreading Oil and Natural Gas" (www.hardassetsinvestor...).

A one-contract spread (long natural gas/short crude oil) put on after the Labor Day break had gained 35% as of Friday's close.

2008 Sep 06 09:12 AM