Developing countries need energy to urbanize. Whether they get it from coal, oil, nuclear or natural gas, the emerging market’s appetite for energy resources should only intensify as they climb the ladder out of the fields and into the cities.
And as Rodney likes to say, “That’s where the fight starts.”
For decades, crude oil has been the energy source du jour. As such, OPEC has enjoyed a tight lock on the market. But this trend has begun to change direction, thanks to the natural gas shale boom on U.S. turf.
Now, I love inter-market analysis. There’s great value in comparing the relationship between interdependent markets. So let’s look at a ratio chart of the futures prices of crude oil versus natural gas…
As you can see in the chart above, between 2009 and early 2012, crude oil prices rose dramatically faster than natural gas prices. In fact, crude oil prices increased about 23% from January 2009 through April 2012. Meanwhile, natural gas prices dropped more than 70%.
In 2009, the ratio of crude oil to natural gas was about 7:1, meaning crude oil cost $7 for every $1 of natural gas. Just three years later, the ratio peaked as crude oil cost $36 for every $1 in natural gas.
That’s when the trend changed. You’ll see above, the ratio is now sloping downward.
While it’s too early to tell for sure, I’m expecting this to be a long-term trend of declining crude prices and rising natural gas prices.
The infrastructure needed to support a wide-ranging natural gas industry is still being built out… but once it’s fully operational, watch for the demand for natural gas to increase substantially as the market pivots away from oil in favor of cleaner burning, and cheaper, natural gas.