While crude oil prices have surged higher on stronger demand from sustained economic growth, natural gas has moved lower. The front month contract is now at levels not seen since March 2004. This was unexpected by many market forecasters.
Part of this decline is associated with a decrease in the hurricane risk premium. After the difficult 2005 season, 2006 saw a seasonal effect based on the expectation that there would again be disruptions in the key Gulf of Mexico producing region. This was supposed to happen again given the forecasts for a number of major storms. The hurricane season lasts from June 1st until the end of October, so we are still early into the season, but there is no activity that would suggest a supply disruption at this point.
Nevertheless, these disruptive events can come up unexpectedly. The height of the season is in August and early September but there are still hurricanes that can hit key Gulf areas near the end of the season. Hurricane Wilma, for example, hit Florida near the end of October. Nevertheless, natural gas inventories for 2007 are above the give year averages albeit slightly lower than last year. Given inventories have had a chance to build, the impact of a supply disruption is reduced. This has been coupled with a relatively mild summer. This weather pattern has led to the low natural gas prices even though crude has moved well past the $70/barrel level.
The correlation between crude oil and natural gas is surprisingly low given they are both classified as energy commodities. Any expectations that they should follow the same pattern should be put to rest. Each should be viewed within their own supply and demand characteristics.
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