Why Natural Gas And Oil Won’t Diverge For Long

Crude oil prices are once again breaking the $62 a barrel level for WTI (West Texas Intermediate, the traded benchmark in New York), while Brent (the most-used global figure set daily in London) is north of $68.

Yet natural gas (according to Henry Hub, the US standard), while drifting up slightly today, has been moving in a very different direction.

Henry Hub, on the other hand, is up 3.6% for the month but down 3.7% for the week.

Both energy sources have faced prospects of excess supply, prompting once again concerns that extra volume will suppress prices.

Crude practitioners have learned to live with the excess extractable oil. Merely because it is in the ground does not mean it needs to be pumped right into the market.

And this will be key for us determining oil’s moves this year…

How We’ll Know Where Oil Prices Are Heading Next

Excess extractable volume will weigh on the price, but less significantly so if traders setting the futures contracts are convinced it will not be dumped.

Remember, this is all about perception. And the perceived cost of the next available barrel continues to drive where contracts are pegged.

To compensate for pricing risk, those cutting futures contracts will peg prices to the highest expected barrel cost while prices are increasing; the least expected barrel cost when prices are in decline. As oil approaches balance between supply and demand (and between availability and expectations), perceptions should narrow.

That is a good development for the predictability of oil prices, although geopolitical matters will continue to throw an element of uncertainty into the mix.

An entire gamut from Venezuelan financial collapse, through saber rattling in the South China Sea, Korean tensions, Libyan and Nigerian civil insurrections, and a once again increasingly dangerous Persian Gulf will guarantee that the unknown will have something to say about how the market approaches pricing.

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