Schork Oil Outlook: The NatGas vs RBOB Paradox

Natural gas prices fall and RBOB increases: counter-intuitive to futures market pricing.

On Thursday, the Bureau of Labor Statistics reported that the consumer price index (CPI) was unchanged month-on-month and only 2.1% higher year-on-year, less than the 2.7% expected by analysts.

Friday’s issue of The Schork Reportdiscussed the implications of the CPI on the dollar — i.e., the relatively low CPI figures helped quell fears about inflation in the United States, which strengthened the dollar which, in turn, led to lower crude oil prices. (See crude prices now.)

In comparison, China saw its CPI for February increase 2.7% year-on-year, higher than the 2.5% expected by analysts.

Outside of the dollar context, the latest CPI figures also tell us about energy expenditure and the general state of the economy, and it appears the dollar was not the only bearish signal for commodity prices. Despite a colder-than-normal winter, the energy index was down 0.5%, its first decline since April 2009.

Gasoline prices led the drop, down 2.5% for average prices across all grades. Automotive diesel fuel followed with a 1.9% drop. For home heating demand, the electricity index fell 0.8%, its third consecutive decline. No.2 fuel oil saw a 2.6% drop in price after increasing 6.4% in December.

  • RBOB Gasoline Futures Now
  • No.2 Heating Oil Futures Now

On the other hand, the natural gas index rose 3.9% and is now ~7.5% higher from the start of the year. This is completely counter-intuitive given futures market pricing, which has seen natural gas prices fall and RBOB increase.

  • Natural Gas Futures Now

In their defense, traders may be looking at the longer term, over the last 12 months the energy index is up 14.4% while the gasoline index is up 36.8% and cold weather left a lot of cars idling in the garage.

In absolute terms, gasoline prices are 37% higher than February 2009 and 18.3% above the preceding five year timestep. Traders should now consider whether prices will follow the short-term trend, and start falling, or the long term trend, and move higher.

Before assuming the latter, they should keep in mind that much has changed in consumer expenditure in the long term.

Take an average good such as sugar, which is now 11.4% above last year and 35% above the 2004-08 timestep; flour is up 40.5% over the same period; consumers are now paying as much or more for data services (think high definition TV, fiber optic Internet, etc.) as they are on gasoline. As the latest retail data showed, spending on bicycles and public transportation has held up much better than spending on new and used cars.

Ultimately, detrimental weather can only account for so much of the drop in retail gasoline prices. With higher food prices, energy expenditure will face serious challenges in the short and long term.


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.