Monday May 14, 2012 9:00 PM CST
The column has to be submitted on Wednesday before the weekend. So this was written May 9 last week, how accurate was it?
Amid Gloom and Doom, Nat Gas Rallies!
Natural gas prices rallied I the final hour of trading to settle at a two-month high and then continued the rise I the after-hours session.
Wall Street Journal, Commodities, May 9, 2012
Wall Street is the only market in the world where the buyers run away from sales. There were actually predictions that natural gas prices would go to zero. The rationale was that prices were falling, all the storage facilities were full, and so producers were going to give it away. That of course is the kind of extreme sentiment that accompanies a market bottom.
Natural gas prices have risen 25% since April 19. We have been recommending the purchase of Royalty Trusts such as San Juan or Hugoton, both of which pay nice dividends. However buying into such properties means enduring short term paper losses, until the market turns.
This same reverse psychology we saw in natural gas April 18 is on display in gold now. A headline today reads, , Gold Loses Its Sparkle . Where is the headline reading, Gold Now Discounted 16% from Recent High.
The US Dollar is advancing and so stocks, oil and gold are falling. The stock market peaked May 1, 2010, and mid-July, 2011. The drop in 2010 was 175 S & P points. In 2011 it was 275 points. So far the market has only dropped 75 points. Expect more declines before the final good buy occurs.
The real story for crude oil is the extreme for the ratio of crude oil to natural gas price. Historically crude oil has traded at ten times the price of natural gas. By April 19 the ratio had reached an extreme of 55 to 1!. Buyers dumped crude oil contracts and scooped up natural gas contracts. The ratio has already fallen to 40 to 1. Markets make lows amid extreme negative social mood regarding product. Now more generating facilities are substituting natural gas for coal, more outlets are being built for natural gas fueling stations, and even the administration is admitting there may be something to this idea. The 200-day Moving average for this ratio is at 32, that is a first support area.
It is always dangerous to put price targets on highly volatile markets like crude oil. Having said that, the 200 week Moving Average is $81.86. And crude hit $77 last August and October. An uptrend line from the June 2010 low at $67, neatly intersects with the 200 week Moving Average around $82. So, a reasonable bet is a lower ratio for crude to natural gas, which could mean a sub $90 crude oil price.
Politicians love to demonize speculators when prices of gasoline are high. They miss the connection with a strong economy. So gasoline prices are coming down, along with stock prices and the world economy, take a look at Spain or Greece. Unleaded gasoline futures have fallen from $3.40 to $3.00, right at the 50 week moving average. Here the $2.60 area looks like a reasonable expectation. We of course, await the Administration to congratulate the demonic speculators at the New York Mercantile Exchange for bringing gasoline prices down……
The price collapse in crude oil has been evident in the weakness of the Energy Service sector, the heartbeat of West Texas. Our proxy for the West Texas economy, Patterson PTEN has been cut in half from $34 to $15.62. It is now trading at January 2010 levels. A drop to $12 is not out of the question.
So where does this leave the West Texas economy? I suspect that this decline will end in May or June. That should set up a rally for stocks, gold, and oil this summer. The markets celebrated a three-year anniversary this past March from the 2009 lows. Wind and solar, the usual alternative energy suspects have bombed once again. Even with subsidies solar producers have gone bankrupt, and wind producers are begging for more subsidy extension.
Neither political party has offered a real US Energy Policy. The low price of natural gas presents a way to finally cast off reliance on the politically unstable mid East. Imagine if the US were not dependent on Mid East Oil. The Saudis could take care of defending the Straits of Hormuz all by themselves. Thousands of US Sailors and Marines could come home. They might be employed building the Keystone Pipeline.
Now there’s a shovel ready idea for you. Will a candidate embrace it?
Back to Monday May 14, 2012
1. We noted the Dollar wqas advancing and to expect more stock marekt declines, so far that is quite correct.
2. We suspected that oil was headed below $90, it dropped to $94 today.
3. Gasoline dropped over 1% today, 2.90 is close by we shall see if 2.60 develops as mentioned.
4. PTEN dropped to 15.27 today, $12 awaits as mentioned
5. We noted the S & P had dropped 175 nad 275 in this time period the last two years. So far this drop had been only 75 points. MACD is really starting to drop now, expect more to come.
6. Natural Gas has held up while most other markets have collapsed, you read it here at TMP
Not bad for a week ago...
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