What do the Minnesota Twins and Gas Bulls have in common?
The crude oil and natural gas markets are mirror images of one another. Bears in the former are scrambling to defend the 62% retracement (May 03rd/25th) at $84.67, while bulls in the latter are hanging by a thread, i.e. on Friday the bears hit a new year-to-date low, $3.583.
On the other hand, in the wake of a poor jobs report, the U.S. dollar moved to another 8-month low and spot Nymex crude oil rallied 1.2% in response. As we look ahead to the new trading week, both markets remain on the cusp of breakouts; crude oil to the upside, gas to the down.
On Friday the ratio between Nymex crude oil and gas settled at 2.3. That is to say, 1 Nymex oil contract (1,000 barrels) could purchase 2.3 natural gas contracts (10,000 MMBtus). That is 3.1 standard deviations beyond the mean relationship as measured since the start of the decade.
What’s more, even if we allow for the bearish impact of shale production, the ratio is still 1.9 standard deviations beyond the mean relationship since the second quarter 2009. In other words, oil is dear and gas is cheap.
We will have more to say regarding Friday’s job’s numbers in tomorrow’s issue of The Schork Report, but suffice it to say, it was not good. Crude oil in the mid $80s translates into around $3 at the pump for occupationally-challenged consumers. Be that as it may, as long as traders continue to chase the dollar lower, they will continue to push oil prices higher.
As such, rather than OPEC, the Fed now has more say in the direction of crude oil prices!
As far as the gas market goes, we said it last Monday and we will say it again… the market is due for a rally (the same way the Minnesota Twins were due to beat the Yankees)… but it is just not happening.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.