Crude oil has been the center of energy-related headlines since 2H14 when it started its dramatic ‘normalizatin’ process while everybody (us included) seems to have forgotten about natural gas. So we thought we should give an update on natural gas as well.
|Chart Source: Market Watch, April 27, 9 pm US CST|
According to EIA inventory report, total domestic natural gas storage has been trending in the same direction as crude inventories –up, way up. As of April 17, total lower-48 working gas underground stockpile stood at 1,629 Bcf (Billion Cubic Feet), up 82.6% from a year ago. However, unlike crude oil inventories which have reached unprecedented ‘no-man’s land’ by any historical record, natural gas inventory is at least still within it 5-year range.
|Source: EIA, week ending April 17, 2015|
Despite the export ban on crude oil, domestic oil may still find ways to move some of the glut to international markets via petroleum products like gasoline and diesel. U.S. already beat Russia and achieved the status as the top natural gas producer in the world. But while LNG seems to offer some promising prospect for gas globalization, natural gas in the U.S. remains land-locked and a distant poor little brother to the tall, dark, crude oil.
Based on an energy equivalent basis, crude oil and natural gas prices should have a theoretical ratio of 6 to 1. The geographical constraint of domestic gas was part of the reason when Henry Hub price dipped below $2 about two years ago, the oil to natural gas ratio exploded to 52:1 (WTI at the time was at ~$102/bbl) surpassing the previous record-breaking 25 to 1 in 2009. That ratio right now is about 23 to 1.
For now, natural gas is in the ‘shoulder season’, neither too cold nor too hot to spur any seasonal demand spike, while also suffering from the same overall demand slow-down as oil with limited capability to move the over-supply outside the U.S. and Henry Hub.
Market Watch also noted that one analyst see the $2.50 level as “a psychological support number,” while T. Boone Pickens said prices will reach above $3 this winter. We believe the $3 or $4 price level is certainly attainable with a couple of cold snaps, and/or hurricanes, but the oil to gas ratio most likely would not revert back to its historical pattern of 8-12x (prior to 2007) any time soon, even with the new normal of $50 oil.