Over The Barrel

Focus: Natural Gas - The Weak Sister

Despite the movement of crude oil to record highs, natural gas prices have struggled. This weakness has taken values relative to crude oil to record low levels. Currently the cost of one barrel of crude oil can buy approximately 12,500,000 btu's of natural gas. At current price levels of $92.00 per barrel for crude and using a conversion rate per barrel of 5.487 million btu, crude prices translate into a price of $16.77 per million btu's. This is over double the price of  $7.36 per million btu's of natural gas. The weakness in values has reflected a number of influences.  These include the following:

• Concentration of supply sources in the U.S. and Canada limiting geo-political risk that is evident in  crude.
• Primary focus of demand is in the U.S. as opposed to developing countries.
• Growing imports of LNG (Liquefied Natural Gas).
• Mild start to the U.S. winter.
• Large inventory overhang.

These factors have all contributed to keeping natural gas in a much weaker price structure as opposed to the tight supply demand balance seen in crude oil.

Although current prices continue to provide the basis for steady increases in production, the large discount of natural gas to crude oil suggests demand should show further expansion as well. In addition, the prospect that temperatures will move back toward normal levels relative to last years below normal heating loads should help underpin prices as well. The growing level of demand should help reduce the inventory overhang at the end of December 2007 to 37.8 days from 45.0 days in December 2006.  With demand likely to expand further throughout 2008 and import levels for LNG to be restrained as demand increases in Europe and Asia, the natural gas market could get progressively tighter as we move through 2008. 

Charts Courtesy of DTN

 If you have questions or comments on Over The Barrel, please contact Steve Platt at 1.877.377.7931 or stephen.platt@archerfinancials.com.

The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation.  The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition.  The information and comments contained herein is provided by ADM Investor Services, Inc. and not Archer Daniels Midland Company.  Copyright © ADM Investor Services, Inc.