Oil and gas prices: Any which way but down

 

Despite persistent talk of a "decoupling" of US natural gas and oil prices, a top energy economist recently stressed that a strong correlation between the two commodities still exists, but he added that the traditional rules of Btu parity no longer apply because the relationship has grown more complex.

Stephen Brown, director of energy economics at the Federal Reserve in Dallas, released his own formula for linking the price of the two commodities, a relationship he began studying after hearing other economists talking about the oil-to-gas price ratio shifting from 10:1 to 6:1. The new equation, which Brown claims has been 80% accurate over the past five years, indicates that the market is in for a long period of $10/mmBtu or higher natural gas, based on the 12-month 2006 NYMEX crude oil futures strip.

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Source: Platts

Using Brown's formula, a January NYMEX crude oil futures price of $67.77/bbl yields a gas price forecast of $11.32/mmBtu for winter gas. With the 12-month strip for oil hovering above $67/bbl, Brown's equation indicates that gas prices may average more than $10/mmBtu for most of 2006—well above most analysts' predictions and the market's consensus.

Supply questions are troublesome...

Oil supply from Russia and other independent producers is rising more slowly than expected this year, putting strain on OPEC. That has helped prices reach a record high, the International Energy Agency (IEA) concluded in an analysis. Non-OPEC supply in 2005 will rise by 675,000 bbl/day to 50.8-mil bbl/day, the Paris-based agency said. The outlook points to a greater reliance on supply from the 11-member OPEC, which is already pumping crude close to full capacity.

Oil prices, which have more than doubled from an average $31/bbl in 2003, have so far done little to hurt economic or oil demand growth, the IEA said.