A Look at the Natural Gas, Crude Oil Divergence

Over the last few months, crude oil has been trading significantly higher. Currently, WTI crude is trading near $104 per barrel. However, while crude oil has been rallying, natural gas has been deteriorating. Until recently, crude oil and natural gas have moved in a somewhat correlated pattern. Yet, due to a variety of reasons, crude oil prices are up 30% while natural gas prices are down 71% since 2008. Natural gas rebounded shortly after the discovery of fracking. This improved method of natural gas extraction involves creating a well – approximately 8000 feet in radius – and fracturing sedimentary rock known as shale. Once fracking had been introduced, the historical high price of nearly $10.50 began its decline to its current value of around $2.00. This long-term downward trend in prices seems to be continuing but there appears to be strong support at the $2.00 price level. Should this support hold, then the increase in the number of long positions and the subsequent price of natural gas is certainly plausible. Crude oil, on the other hand, has been on a steady uptrend since the end of the third quarter last year. Whether it is the failure to meet demand or reluctance to exploit untapped oil resources, oil companies are finding it difficult to explain the nature behind these soaring prices. Regardless, this bullish long term may not let up anytime soon. In the short-term, however, there appears to be a symmetrical triangle as the price remains between $105 and $110. These prices may not vary a great deal in the coming days provided certain factors (e.g. the Israel – Iran conflict) stay under control. This discrepancy in crude oil and natural gas is not reflected simply in the price of the commodities, but also in the markets themselves. Crude oil has presence in the international market whereas natural gas largely does not. Despite the fact that these commodities are often treated as substitutes, natural gas is considerably more difficult to ship than crude oil. Furthermore, the technology involved in extracting crude oil is more universal than that for natural gas. It may very well be that these differences were manifested during the last few quarters when economic recovery was sluggish at best. Given the uncertainty of current prices and analyst expectations for the upcoming year, there still remains a chance for this divergence to stabilize.