Ratio of Crude oil price to natural gas price (click to enlarge)
The ratio, which is said to have a historical ratio of 10, is now over 20 and looks to head higher.
(click to enlarge)
The equation to generate the chart is:
=(1000*’CL Z0′ – 10000*’NG Z0′)
At FutureSource, click on “Charts” and enter the above equation in the cell labeled “Symbol or Contract” under “Get A Chart.”
Here’s the math:
December crude oil: $86.50 x 1,000 barrels = $86,500
December nat gas: $5.271 x 10,000 btu = $52,710
Hence, the difference of approximately $33,790 (as of the close May 5).
(click to enlarge)
When compared to the YoY spread, there is an 84% correlation according to Moore Research. The data on the Y-axis signify the difference in notional values between the 2 contracts.
What does this signify?
For the ratio (quotient) to rise, either one of two things must happen:
– Crude oil ranges and natural gas falls
– Natural gas ranges and crude oil rises
or both!
– Crude rises and natural gas falls.
To keep things in perspective, below is a historical relationship between Crude Oil and Nat Gas using a continuous chart.
(click to enlarge)
Top 2 charts and bottom chart can be generated at FutureSource, a free site.
Crude oil / natural gas spread analysis courtesy of Jerry Toepke and Melissa Moore at Moore Research Center, Inc. This is premium site, but you can try a 14-day risk free trial.
Very interesting post. What would be a good point to buy Natural Gas at do you think given that it is at multi year lows right now, if I was to hold for 5 or ten years? Jim Rogers reckons it's a buy (albeit I am paraphrasing!). Thanks again Michael.
Low prices cure low prices. Multi-year lows beget further multi-year
lows. It's not in my nature to buy something as such. If prices are too
low for producers to bring further nat gas to the market, they will stop
and we'll have to see the contracts trade sideways until all the glut
has been consumed.
If you're following Victor Sperandeo's 123 Trend Reversal rules, the
front month would have to trade above $4.500 to start an uptrend.
my best,
Michael Martin
MartinKronicle.com <https://martinkronicle.mystagingwebsite.com/>
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Thanks Michael. Looks like it's getting close to the buy level already! I would have thought since low prices cure low prices, and therefore presumably have a tendency to revert to a mean, that such lows do NOT beget further lows…unless I am misunderstanding this apparent contradiction? Keep up the great work by the way, the recent podcasts were great.
I don't use the arithmetic mean as a buy point. My guess is some traders
play the /reversion/ to the mean as a trade, and once achieved, they go
flat. They sometimes have to wait out long periods b/c the ratios don't
have to move for anyone.
I don't use the arithmetic mean as a buy point. My guess is some traders
play the /reversion/ to the mean as a trade, and once achieved, they go
flat. They sometimes have to wait out long periods b/c the ratios don't
have to move for anyone.