Commodities: Natural Gas In Free Fall, When Does Oil Follow?

The price of natural gas is in a free fall. This week the price of the energy commodity plumetted to the lowest point since 2002 (bespokeinvest.com). This is reaction to the mild winter in the U.S. (reduced demand for heating) and a rising supply (businessinsider.com). But the oil price is sticking close to the $100 mark and didn`t move much in the recent months (marketwatch). This is somewhat surprising because both commodities are used for heating and producing electricity.

It seems that the market for natural gas reacts to the economic fundamentals and the market for oil doesn`t. The market for oil ignores the mild winter in the U.S. and Europe and the rising oil production in the U.S. and other Non-Opec-countries (cnn.com). It also ignores the shrinking demand for the commodity in the U.S. and Europe. Bloomberg wrote that gasoline consumption fell to the lowest in 10 years in the U.S., which is the world’s biggest crude consumer (bloomberg). U.S. demand for oil products in the latest four-week period was down 7.2 percent from a year ago, according to Societe Generale SA. I guess that U.S. companies and consumers now are reacting to the high gas prices at the pump and to the mild winter.

But it seems that the price for Oil is not driven by the facts, instead just by speculation & rumors about what could possibly happen in the future. In the spring the price for oil was high because of speculation that the war in Iraq might almost last forever, hindering the oil flow from this important producer country. As the war ended the change was ignored because of speculation that Iraq`s oil production would need many years to recover. Now Iraq is back on the oil market, but this is again ignored because of speculation that Iran may reduce its supply or close the straits of Hormuz, stopping the oil transports from the Arabian neighbors (drivebycuriosity).

These rumors are spread by a mighty group of speculators who seem to control the market for oil, including a bunch of hedge funds, who invested billions of dollars into the commodity, and banks like Goldman Sachs, who earn big amounts by trading commodities.

The situation reminds me of 2008 as the price of oil climbed to $147 even the recession had already started.  This price explosion was caused by rumors about alleged supply disruptions spread by Goldman Sachs and others (drivebycuriosity). In the second half of 2008 the price of oil imploded because the exorbitant high oil price destroyed the demand for this commoditiy.