Natural-Gas Discount to Crude Is `Too Large': Chart of the Day

By Dan Lonkevich

Aug. 18 (Bloomberg) -- Natural gas is poised to outperform crude oil after prices for the heating and power-plant fuel dropped almost 40 percent since the end of June.

The CHART OF THE DAY shows how the ratio of crude to gas futures prices on the New York Mercantile Exchange rose Aug. 14 to the highest level since September 2006. It also shows how historically, gas outperforms crude after the ratio climbs to more than 10 or 12 to 1. The ratio of oil to gas prices, which has averaged 8.04 since 2000, reached 14.14 last week.

``It's too large of a price disparity,'' said Tom Orr, director of research at Weeden & Co. in Greenwich, Connecticut.

After a barrel of oil rose to 12.92 times the price of 1 million British thermal units of gas on Jan. 3, the ratio slid to 10.06 on March 31 and went below 10 in June. Gas futures have tumbled since the end of the second quarter, falling twice as fast as crude, amid a slowing economy and increasing fuel production from U.S. shale formations.

Oklahoma City-based Chesapeake Energy Corp. and other gas producers announced discoveries of as much as 44 trillion cubic feet of gas in the Haynesville Shale region of East Texas and northwest Louisiana.

``Gas is trying to hold a bottom at $8 per million Btu,'' Orr said. ``If you have a bit of good news it won't stay that way for long.''

Gas for September delivery traded as low as $7.96 per million Btu on Aug. 15. The futures traded as high as $13.694 on July 2. Orr said he sees prices rising to $9 or $10 in about six months.

Demand can react when oil and gas diverge. Gas competes with oil-based fuels in 5 percent to 10 percent of U.S. factories and power plants, according to the National Petroleum Council.

To contact the reporter on this story: Dan Lonkevich in New York at dlonkevich@bloomberg.net.