Natural Gas versus Oil

Discussion in 'Commodity Futures' started by plan, Jun 6, 2009.

  1. plan


    Why is Natural Gas so cheap while Oil has basically doubled off the bottom?
  2. My take on this is two-fold.

    First is the current housing market. With the construction and sale of new homes having taken a nose dive there is either a stagnant or declining demand for natural gas. Another would be the production of chemicals and fertilizers being down. Both use large quantities of natural gas during production. There are likely other reasons along this line.

    The other side is all the oil wells that went up in the last year in North Dakota and Montana are also bringing out significant quantities of natural gas.

    My guess is with the situation I outlined above is that there is a significant oversupply. Looking at a recent chart of UNG, my guess is that natural gas will continue to move down for some time. Looking at the commidity, it seems the daily and weekly commidity is forming a bear flag ($NATGAS @
  3. plan


    Good point. I also just remembered that oil sands need a lot of natural gas and tar sand productions have gone down considerably -- breakeven point for many of them is $70 bbl
  4. MTRIG


    Take a look at the EIA data. There is a lot of NG in storage, so supply is way up. Crude is also at 9 year highs, but more sensitive to people thinking the worst is behind the market.

    So far this summer has been COLD and gas usage has to go up. I have bought iPath GAZ partly on this concept, and that some indicators such as RSI is diverging from price. Nothing else, always trade with stops...

    EIA: "Natural gas in storage was 2,337 billion cubic feet (Bcf) as of May 29, which is about 22 percent above the 5-year average (2004-2008), following an implied net injection of 124 Bcf during the report week. "

  5. Industrial demand for nat gas is down, production is up, storage is full. The silver lining is that gas wells tend to fall off quickly, particularly those in the newer shale plays, eg Haynesville and Bakken. Drilling is down substantially, so it is entirely forseeable that production will begin to decline substantially just as industrial demand picks up.

    Don't fall into the trap of comparing oil and nat gas prices. Different markets, different end users. China has been importing a lot of oil to fill its strategic reserve. A lot of oil supply is also subject to political risk. Nat gas, not so much.
  6. Holy shit! Amazing that everyone that's posted thusfar is correct, AND nobody is falling for the oil:natty ratio actually having any meaningful implications. Just about everyone on the UNG message board thinks that oil and natty have to come back inline.
  7. MTRIG


    Papa Roach,

    I went to the USG board on Yahoo! finance and I see what you mean.

    There is a post from that features some guy "on the street of NY" going on about how all the NG rigs have come off line, that there is a huge reduction in reserves, and as you said "NG should come back in line with oil."

    If a person did not read the EIA report that NG reserves are 22% above a 5 year MA would think this guy was on the ball.

    If we were in the fall season I would probably load up on NG at this level. There may be some upside because of the price level, and because of the cooler summer. In Michigan we still have the heat on at night, it has been in the 50's. So there may be a bump in NG, but a huge rally? I think reserves have to be drawn down a bit....

    Or if we get some NG cars on the road then everyone in the Northen states will be broke in the winter since NG would skyrocket.
  8. What the UNG investors can't seem to grasp is the concept of what they are actually trading, "futures". They think we will quickly rally to $6 in the coming months, giving them alomost a double on their investment. Well, they are right about $6 in the coming months, January futures are already there!! As they roll forward each month, the price rises and they don't make a penny off the curve. Sad.

    We will have a point when the supply/demand curve flips hard enough to bring prices haigher, if you plot each futures month out (the curve), you will see the market is calling for production shortfalls by the end of the year. But anyone thinking they can buy gas at $3.50 and hold it for a rally to $6 is mistaken.

    I do believe we will hit our absolute bottom either with the Sep or Oct contract, at which point we will go back to a buy the dip style market. As far as price, I wouldn't be suprised if we got as low as $2.00 to $2.50.
  9. plan


    Great stuff guys, thanks for the input.
  10. Why does the spread cost that much to carry? Wouldn't you just hold nat gas inventories then wait and sell a future contract against it, or does it cost that much to hold nat gas in storage for months?
    #10     Jun 7, 2009