Drillbits

Natural Gas Heading for a Double?

The general rule of thumb relationship between the price of one barrel of oil and one mcf of natural gas is 6 to 1. Based on the btu's available to power generation plants from each energy source, if oil is trading at $60/bbl, then the equivalent cost of using natural gas would be $10/mcf. Seasonal supply and demand factors always skew this price relationship somewhat but because U.S. power generators are the largest users of natural gas and signifcant users of heating oil, the relationship tends to revert to the 6:1 mean as the pricing disparities drive demand to one or the other.

This morning, crude oil futures have set another record by crossing above the $130/bbl mark yet, natural gas is trading at $11.50/mcf. The old "rule of thumb" says that either natural gas should be $21.66, or oil should be at $69. The difference this time around, however, is that oil demand is coming from outside of the old price dynamic; namely, the rest of the world, And, further, supplies cannot keep up.

It doesn't sound like oil is heading to $69 anytime soon. With peak power demand coming in the months ahead...........can you say $20 natural gas?

Early yesterday, investor T. Boone Pickens told CNBC he expected oil to hit $150 this year because supply isn’t keeping pace with demand. Very interesting interview at: http://www.cnbc.com/id/15840232?video=748353630&play=1