By: Larry MacDonald
The divergence in natural-gas and crude-oil prices has gone to an extreme. Natural-gas prices have fallen below $4 (U.S.) per million British thermal units while crude oil prices have shot up and are hovering close to $70 (U.S.) a barrel, leaving the ratio of oil-to-gas prices nearly double the historic average.
Many investors are now buying gas stocks and exchange traded funds (ETF), thinking they are cheap. Of note, trading volumes are soaring for the United States Natural Gas (UNG) and the Claymore Natural Gas Commodity ETF (GAS), the ETF tracking Canadian gas prices.
But new sources of supply are emerging in areas such as shale gas and LNG due to technological advancements. In the U.S. alone, the Potential Gas Committee reports that there are now about 2,000-trillion cubic feet of recoverable natural gas still in the ground, a nearly 60% increase from estimates four years ago.
Given this upward structural shift in gas supply, wouldn’t it be possible that a great deal of the narrowing in the spread between gas and oil prices will come about from lower oil prices instead? The oversupply situation in gas could be like an anchor that weighs down oil prices, as energy users increasingly switch from oil to much cheaper gas (and speculators catch on to the dynamics). The substitution effect may also get a boost from governments favoring natural gas as a cleaner-burning fuel with less dependence on foreign suppliers.
Who knows, maybe we are entering a period of inexpensive energy prices again? The Peak Oil thesis had us going for awhile. However, other fuels such as natural gas could perhaps step up to the plate and keep prices reasonably sane.
2 Responses to “ Gas oversupply to weigh on oil prices? ”
Let’s hope so. Then again it seems like the only way anything affects gas prices is in a negative way.
By Jack Zufelt on Jun 22, 2009
something really smells here. oil going from 60 to 140? that’s not a normal progression of pricing. i blame it on some major traders who have control. As in the past, it has shocked the economy. But the ultimate purpose is THEIR self interests. I agree with more natural style of living but hate when groups, who have no direct involement in production, take advantage of the situation. As much as I am for free enterprise, I also firmly believe in moral objectives. Yes, we have to get to alternative fuels but by blackmailing and crippling the population is not the answer.
I think the US has an issue. They have to realize what energy really costs, not just consumption wise, but infrasture wise, compared to the rest of the world their cost of fuel is minimal. The end result is this crisis.
Most countries through the world impose taxes which address (theorectically) an infractructure to provide for transportation. Why doesn’t the US do the same?
my emqil is scijj@hotmail.com
By john on Jul 10, 2009