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1 Mar 31 2010 @ 10:50am by Matt Smith in Capital Markets, Crude Oil, Economy, Natural Gas

Revisiting Old Friends.

As we reach the end of an eventful first quarter, it seems an appropriate time to reflect and review some of the charts we have looked at on our journey through energy burritoville since its inception last fall. So let’s jump straight to exhibit one. We looked at the oil/gas ratio back in mid-December, when crude was at $73, natty at $5.50. This put the ratio at around 13, while the near-term mean (= 200-day moving average) was above 15. We highlighted at the time that the ratio should rise, as natural gas was at an eleven-month high, while crude was at a two-month low:

Oil/Gas ratio - 12/16/09

Fast forward three-and-a-half months, and the ratio continues to elude its near-term mean, but this time to the other extreme. As the natural gas prompt month is at a six-month low (<$4), crude is testing near-three-month highs ($83). The ratio has blown out to the upside, and is now above 21 (versus the 200-day moving average of 16). The ratio may narrow over the coming quarter, as crude lets some pressure out of its tires, while natural gas could find some near-term support after a post-winter drubbing (or at least see limited downside):  

Oil/Gas ratio - 3/30/10

The second old buddy is the VIX. Again back in mid-December, we took a look at the VIX index – which was at a depressed level (the VIX measures volatility on options on the S&P500 equity index), indicating a low level of worry for a downside move in equities. What has happened in the last quarter or so? The S&P500 has moved from a fourteen-month high to an eighteen-month high. Risk-taking has continued, while fear has faded like a pair of old Levis. In summary, much of the same. But just like a stopped clock tells the right time twice a day, I still call for a significant correction in equity markets, which will in turn cause volatility to spike once more. These two shall cross swords:

Last, but by no means least, our final familiar friend is the underemployment rate. This measures those people who are unemployed, those who are working in a part-time job (but wish they had a full-time job), and those who are so discouraged that they have stopped looking. When we took a look at this rate last fall, it was at 17.8%, while unemployment was at 9.8%. Currently the underemployment rate has retreated to 16.8%, while unemployment is now back to 9.7%. Friday sees the March nonfarm payrolls released, which should show the first significant increase in jobs in well over two years. That said, this number (and the coming months) will be distorted by temporary Census workers, while February’s inclement weather (which dampened labor growth) will probably skew March’s number higher. The main takeaway here is that although the next few months may paint an improving employment picture, do not be lulled into into a false sense of security; we are not out of the woods yet:   

1 Comment on this post:

  1. […] 25. We have taken a look at this ratio a couple of times over the last few years (first here, then here) as it has rocketed higher, but surely it has now reached the stratosphere and is set to descend, […]

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