Blogs & Comment

Gas oversupply to weigh on oil prices?

The divergence in natural-gas and crude-oil prices has gone to an extreme. Natural-gas prices have fallen below $4 (U.S.) per million British thermal units while crude oil prices have shot up and are hovering close to $70 (U.S.) a barrel, leaving the ratio of oil-to-gas prices nearly double the historic average.
Many investors are now buying gas stocks and exchange traded funds (ETF), thinking they are cheap. Of note, trading volumes are soaring for the United States Natural Gas ( UNG) and the Claymore Natural Gas Commodity ETF ( GAS), the ETF tracking Canadian gas prices.
But new sources of supply are emerging in areas such as shale gas and LNG due to technological advancements. In the U.S. alone, the Potential Gas Committeereports that there are now about 2,000-trillion cubic feet of recoverable natural gas still in the ground, a nearly 60% increase from estimates four years ago.
Given this upward structural shift in gas supply, wouldnt it be possible that a great deal of the narrowing in the spread between gas and oil prices will come about from lower oil prices instead? The oversupply situation in gas could be like an anchor that weighs down oil prices, as energy users increasingly switch from oil to much cheaper gas (and speculators catch on to the dynamics). The substitution effect may also get a boost from governments favoring natural gas as a cleaner-burning fuel with less dependence on foreign suppliers.
Who knows, maybe we are entering a period of inexpensive energy prices again? The Peak Oil thesis had us going for awhile. However, other fuels such as natural gas could perhaps step up to the plate and keep prices reasonably sane.