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Thursday, August 27, 2009

The oil/gas price ratio gone wild!

Aug. 25 (Bloomberg) -- Crude oil has become so expensive compared with natural gas that the record price ratio between them probably won’t last, analysts say.

The CHART OF THE DAY shows the prices of these commodities since 1990, when natural-gas futures started trading on the New York Mercantile Exchange, in the top panel. The ratio between them, which closed at a record 26.4-to-1 last week, appears in the bottom panel.

The ratio has more than tripled this year amid a 67 percent increase in crude prices, bolstered by speculation that Chinese demand will climb. Gas prices have fallen 48 percent on reduced demand from industrial companies and the start of production at new U.S. fields.

“History clearly suggests that the price gap will eventually narrow, through some combination of oil prices falling and natural-gas prices rising,” Donald Marron, a former member of the Council of Economic Advisers, wrote in an Aug. 21 posting on his blog.

The timing of any return to historical norms, also known as mean reversion, is questionable. Marron didn’t speculate in his posting about when that might take place.

“Who knows when we’ll see some reversion to the mean,” analysts at Bespoke Investment Group wrote yesterday in a comment highlighting the oil-gas ratio.
--from "Record Oil-Gas Price Ratio May Be Set to Narrow: Chart of Day " by David Wilson

The chart referred to in the above is here (click on the "GRAPHIC" tab).

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