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0 Dec 15 2011 @ 10:55am by Matt Smith in Crude Oil, Natural Gas

The Emergence of Convergence

Hey yo, this post is based on a simple observation relating to the current nuttiness of natural gas and retail gasoline prices. 

The two prices have converged to parity recently, but not for the reasons we may have previously considered. It seemed more likely that the two would meet due to wintry weather boosting natty, and increasing demand boosting gasoline, but neither of these scenarios have played out. So let’s take a look at some of the real reasons for the emergence of this convergence.

1) Natural Gas: Total supply is as strong as an ox  (now around its highest level for the year)

2) Gasoline: Demand is as meek as a lamb (down 4.5% versus same 4-week period of last year)

3) Natural Gas: Storage polevaulted itself (à la Sergey Bubka) to a new record level of 3,852 Bcf last month

4) Gasoline: The national average retail price has slid 18% from the high of $3.985 in early May

5) Natural Gas: After the deficit to last year’s storage level reached 275 Bcf in June, we have now flipped to a storage surplus of 154 Bcf

6) Gasoline: Inventories in the US have just reached a five-year high for this time of year at nearly 219 million barrels

7) Natural Gas: Prompt month prices have not been below $4 in December since 2002

8) Gasoline: Distillates are seeing year-on-year demand growth, leading to increased refining, which is ramping up gasoline production as a bi-product 

9) Natural Gas: A warmer-than-normal start to winter (hark, see left) is limiting heating demand in key regions

10) Gasoline: The disparity between distillate (=diesel) and gasoline demand is typified through their pricing. Current retail gasoline prices are up 9% versus last year, while retail diesel prices are up….20%

There you have it. There are a number of different cases of emerging convergence in commodityland™ currently, from European coal and Brent crude prices, to the narrowing spread between Brent and WTI. However, none is as oddly intriguing as the marriage of natural gas and retail gasoline prices, and the prospect of whether this trend will hold.

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