[Edited October 15, 2012 to add Reuters link and Citicorp PDF ]
Natty outperform black gold? Texas tea? Yes it's happening and the intriguing part is it could continue. It's unimaginable, unheard of, pure heresy but it at the same time, appears to be the Captain Obvious trade to these novice aging eyes. While I'm no guru and don't begin to know it's intricacies, allow me to explain from a technical analysis and common sense point of view. [CLICK ON ANY CHART TO ENLARGE]
#1 Falling crude oil demand in developed countries continues and this decline is expected to continue going forward......while increasing demand is expected in developing countries however I doubt quite a rapid increase given the status of global economies at this point in time. Main point however, is that the U.S. itself is not expecting to increase its demand any time soon.
#2 The push for American independence from foreign oil. Now before you roll your eyes thinking this is a political pitch, I'm merely pointing out the obvious with nonpartisan facts that can easily be found at the Baker Hughs website. While prior administrations have all *touted* they were for pushing for this initiative, only in the last four years have we actually *seen* a change in U.S. oil rig counts, increasing 4x from prior levels. That, my friends, is a definite step in the right direction [imo].
In February 2012 Citigroup acknowledged the enormous expansion of new US crude oil supply thanks to North Dakota and announced The Death of the Peak Oil Hypothesis and that this excess supply will apply future downward pressure on crude pricing.
#3 Now for some simple common sense. I'm certain the big boys would love to push crude's pricing to test the 2008 highs [and they will one day] but given not only the fragile U.S. economy, but slowing in every other global economy, I don't see how anyone with half a brain is going to risk pushing the consumer off a ledge with higher gasoline pricing. After all, anything over $4/gal. begins to weigh on the economy. Additionally historic crude oil spikes have been proven to be followed by economic recessions [see research data here] so let's just take the idea of higher crude oil [minus any temporary spikes due to Middle East tensions] off the table. So how's a poor oil baron to make a buck? Why by letting natty have it's day in the sun of course!
#4 So let's lower the # of natural gas rigs [red], tightening supply, and increase the crude oil rigs [blue].
Fewer rigs = less supply
Interestingly enough, the EIA has predicted that the US will become a net-exporter of natural gas as well. Nice! [See report]
Then let's take a look and see if Mr. Stockmarket is confirming my thesis.
On a daily basis I usually view heavy volume as a sign of selling, however on a longer time frame [monthly] you can see where USO was experiencing enormous volume on dips prior to it's enormous run up. Short covering and accumulation on a large scale. Big players can then sit back and unload gradually over time.
*Now* we see the same huge volume in the nat. gas ETF, UNG but does that alone mean anything? Let's look further.
IN futures we see that Natural Gas futures [/NG] are in Contango with future contracts pricing higher than the current. Translation: higher forward prices are an indication of expectations of supply tightening; hence the higher forward price.......and this is the first time in YEARS that this has been the case.
How about seasonal demand? It begins to creep up in September anticipating colder temperatures. A warmer-than-normal Winter such as we saw last year would hamper demand however Minneapolis MN received 2-1/2 feet of snow just last week [!] so one can only wait and see. Hope for cold temps folks.
Next we examine a chart of the "Widowmaker" UNG, which for years took everyone and anyone's money who tried to get long as Natty. Reason being is that nat gas had an ever-increasing excess supply causing "backwardation" [lower forward pricing] and since UNG quite often recalculates based on the next months contract [which was lower in price], any long buyer was basically swimming against the current like a Salmon going upstream [but they have more success]. Now that natty is "Contango", forward contracts are higher, helping UNG with a boost as it re-balances. fwiw we were watching natty this Summer in Chat and had a buy signal @ $16.00!
Lastly, I compared the performance of USO to UNG and not only is natty outperforming, it broke major support in the USO/UNG ratio. In my mind, this is significant. I'd like to see a correction on a weekly time frame to test $17 support but for now, my bet is nat gas will continue to outperform black gold for the near term. Come on Winter!
Clearly I am more of a t/a trader than a long term, fundamental investor therefore I urge you to do your own diligence. I currently have no position in UNG, USO, nat. gas or crude oil futures nor do I intend on establishing one within the next 72 hours.