VP of Common Sense

Fadel Gheit: Oil Prices to Remain Inflated but Don't Pass on Gas

My simplistic view is that natgas pricing is far more indicative of the US economy than oil, thus the discrepancy.

In the case of oil, once demand exceeded supply the price rose exponentially. Now that supply and demand are more or less hand in hand again the price reverts to the marginal cost of producing the last barrel. Which, for oil sands, is pretty high.

Regarding domestic natgas, something close to the opposite is going on. Demand is well below supply and pricing has fallen to the lowest cost of production. Remember, once the well is built (using the term "well" generically) the operator might as well run it as long as the sales price exceeds the cost of operating. So lots of wells are being capped and we are down to the lowest cost producers.

Since that is the basis of my beliefs, I think that natgas will respond primarily to the domestic economy, meaning pricing rebounds in late 2010. Oil will probably come back sooner as supply cannot keep up with demand when the worldwide economy is at full speed.