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Posts Tagged ‘price forecasts’

1 Dec 16 2009 @ 9:00am by Matt Smith in Crude Oil, Natural Gas

Oil/Gas ratio

Let’s take a look at something that was on everyone’s radar this summer (hark, Lisa Zembrodt on CNBC discussing the topic du jour) until suddenly it disappeared without so much as an au revoir. So without further ado, we revisit the oil/gas ratio: 

crude natty2

Among various other stuff, I have two pieces of paper pinned to my cubicle wall  – one is a picture of Kent Evans, Summit’s Marketing Manager (a picture that never fails to amuse me), and another is Bob Farrell’s 10 Rules For Investing. Bob Farell was a legendary chief strategist at the now-sadly defunct Merrill Lynch. Rule #1 from Mr Farell states: Markets tend to return to the mean over time.

Why so sad?

Why so sad, Mr Evans?

So let’s cut to the chase and slice and dice our burrito. The interesting part about this ratio is that it illustrates the dichotomy of crude oil and natural gas pricing this year – the ratio was relatively unaffected by last year’s great commodity bull run and subsequent crash.

It wasn’t until 2009 that the ratio blew out as crude oil rebounded, and natural gas continued to tank, reaching a crazy-record ratio of 27. However, since the summer we have seen this ratio crumble, along with the interest in it. The ratio has now fallen below the near-term ‘mean’ – the 200-day moving average (blue line on the chart). 

Referring back to Mr Farell’s first rule, three possible short-term scenarios are:

1) natural gas will rise, but crude oil will rise at a faster pace
2) natural gas will trade sideways, but crude oil will rise
3) natural gas will fall, but crude oil will fall at a slower rate

Given that natural gas is at an eleven-month high and crude oil is at a two-month low, the immediate assumption is for a reversal in each of their current trends. However, as we know in commodity markets, nothing can be taken for granted. After all, Exxon Mobil’s acquisition of XTO Energy this week is betting on a further narrowing in the oil/gas ratio. Sometimes all we can do is base our expectations on the smarts of such people as Mr Farell, and avidly watch how the situation unfolds.

0 Sep 16 2009 @ 10:45am by Matt Smith in Capital Markets, Global Energy, Natural Gas, Random

Supply, demand & market equilibrium = rock-paper-scissors

This cheap jerseys is not a profound assertion, but merely an observation: commodity markets are always in a state wholesale MLB jerseys of flux, because, just as rock-paper-scissors doesn’t have a single dominating force, commodity prices constantly face a myriad of moving forces. There may be a millisecond or two at a moment in time where a market is balanced, but in reality, the most efficient market will always have some sort of imbalance. This supply and demand volatility at: is further escalated by factors ranging from investor sentiment to technical analysis. 

rock

Rock-paper-scissors is not a game of chance, and neither are commodity markets. You have to place some faith in a rational approach by studying the fundamentals of a Treatments market to forecast future trends, because it is overwhelmingly likely that supply and demand “MAKS?PAK are the key price drivers (barring technical analysis). But while in rock-paper-scissors you can always ask With for wholesale MLB jerseys the ‘best of’ 3, Dead 5, 7, Collections ad infinitum (depending how badly you are getting beat), adverse price movements from an ill-timed trade means you can be punished for a single weak decision; hence the need for extreme care.