Ok, crude prices were up again yesterday. This is starting to get ridiculous. There’s no hot war (yet), but crude oil prices are up nearly $33.00/bbl over the past five months, $12/bbl in the last two weeks. NYMEX April crude closed at $107.84/Bbl, up $1.55. It popped over $108 for a while, a level last reached in May of last year. Technical analysts are going crazy with this signal confirming all sorts of breakouts and new trend lines. Could WTI get back to $145.29/bbl hit on July 3, 2008? That’s not even a stretch. Yesterday Brent almost hit $125/bbl. So crude traded on the international market is only twenty bucks away from the record high number. Just 15% more to go.
It is not just crude oil. The entire liquid hydrocarbon complex is running wild. Motor gasoline. Diesel. Propane. Butane. In fact, any NGL except for ethane.
If it pours, it roars.
There’s no secret about what is going on. With crude demand down and U.S. crude production increasing, this is a good, old fashioned war premium. The crude oil markets seem to be convinced that something bad is going to happen in the Middle East, probably Israel taking out Iran’s nuclear facilities, and then Iran taking vengeance on the Strait of Hormuz or who knows whatever else. The blogosphere is handicapping this scenario at somewhere between 25% and 75% probability, to occur sometime in the spring. But you never know when those Israelis might strike. Who wants to be short over the weekend with this kind of thing looming? The market price will tell you – not many traders.
And what is natural gas doing in the midst of all of this feeding frenzy? Yawn. March Natgas was down yesterday $0.022/MMbtu to $2.621. April lower by $0.014 to $2.761. That’s a 41X crude/gas ratio. It has been higher, but not by much and not for long. If we isolate on the fundamentals of the two markets, a ratio above 40X makes complete sense. Natural gas supply is extremely long. The math (recounted in My Capacity Runneth Over. Will it take a miracle to fix the Natgas supply imbalance? ) indicates that storage capacity will reach maximum levels in late summer 2012. Crude oil prices are high and could go much higher if Middle East hostilities flare. In such a scenario, the crude/ratio could easily blow through 50X.
What would such a market look like? Let’s say that the Israelis “nuke” Iran (with conventional warheads, of course) and crude oil goes to $200/Bbl. What happens to natural gas? Probably financial traders push a sympathy run – at least to $3.50/MMbtu Even then it is still an unprecedented 57X crude/gas ratio. So high we are beyond the ozone layer, into deep space. The price would be great news for natural gas producers, even those in dry plays. At $3.50/MMbtu the economics of natural gas production look pretty good in plays all over the country.
Drill baby drill! Chesapeake rescinds its shut-in strategy! Rigs rush back to the Haynesville! Profitability on wet gas and crude oil plays goes off the scale! Gas processors awash in profits! Texans win Super Bowl XLVII in New Orleans! Sorry, got carried away.
So here’s the thing to contemplate this weekend. If hostilities drive crude oil prices in to the stratosphere, and even a small piece of the bullishness bleeds into natural gas prices, the possibility of a train wreck in November gets pretty high. High prices encourage continued growth in gas production and discourage fuel switching. Inventories build until there is absolutely no more capacity in any storage facility.
I have a hard time believing in Armageddon scenarios. They have been threatened so many times, but relief always seems to come from somewhere, somehow. But if crude oil blows out, it is hard to imagine what will save the natural gas market. Better get prepared for the possibility of really wild hydrocarbons market prices.
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p.s. – If hostilities spike prices, and prices spike oil company profits, don’t forget about that old political mainstay, the windfall profits tax. After all, it is an election year.
p.s.s. – What if there is no attack? Somehow the whole Iranian nuke thing gets resolved. Then what? Then the fundamentals of crude would rear their ugly head. Crude would drop to $80/bbl. On the gas side, the combination of producer curtailments and coal-to-gas switching gets the market just under the wire in October and prices increase up to $4.50/MMbtu as an early, cold winter kicks in over Thanksgiving 2012. That’s a crude/gas ratio of 18X, and my personal favorite scenario.
If you have a scenario you like better, please email it to me or add it below. We’ll see who is the best guesser.
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