Thursday, December 3, 2009

Natural Gas vs. Unleaded Gasoline



As a believer in Return-To-The-Mean theories, I offer my summary of the chart above. Either gasoline is roughly twice as expensive as it should be, natural gas is roughly twice as cheap as it should be, or there is a combination of both.

My gut says that gasoline is way too expensive. I think speculators have once again driven up the price of oil to unsustainable levels under the assumption that it is a riskless trade. The only other conclusion is to think that natural gas is a table pounding screaming bargain right now. While it is possible, I am skeptical.

U.S. Stockpiles Are Rising, Sending Natural Gas Falling

"The bottom line is that you are at the end of November, and you are still putting gas in the ground," said Stephen Schork, editor of the energy advisory newsletter the Schork Report, adding it would take an "ice age" to send prices significantly higher.

I think this has huge implications for those convinced that heavy inflation is a sure thing in the coming months. Based on the price of oil, gold, and TIPS yields, there seems to be an ample supply of potentially very disappointed investors.

Several weeks ago, I even put my money where my mouth is. I sold TIP.

Source Data:
EIA: U.S. Natural Gas Wellhead Price
EIA: Motor Gasoline Retail Prices, U.S. City Average
at

18 comments:

  1. G.H.December 3, 2009 at 6:39 PM

    TIP has a .8% drawdown off its high of 106.57 on 11/30.

    I'm sitting on a tidy profit and am vigilantly watching, prepared to pull the trigger if weakness continues.

    Ordinarily I would have used a 3-4% drop for a sell-stop due to the intermediate term nature of the fund. However, thanks to discovering this blog I'm not going to wait that long.

    ReplyDelete
  2. EconomicDisconnectDecember 3, 2009 at 7:02 PM

    Mark,
    GREAT POINT!
    The natural gas oddity has been a thorn in my side but I never get around to it. Sadly I think it relates to gold/silver as well, as you have covered. Something is not right.
    Dang it all!

    ReplyDelete
  3. Stagflationary MarkDecember 3, 2009 at 7:13 PM

    G.H.,

    I hope I don't influence you into doing the wrong trade. I'm basing a lot of my decision on the idea that I've got maybe a 30% chance of being right and a 70% chance of being wrong.

    If I am wrong, my gut says I could experience a 1% opportunity loss by being out of TIP. There just isn't that much upside left to me.

    If I am right, my gut says I could avoid a 5% actual loss by being out of TIP. I won't be trying to time the bottom. I just want a price decent enough to want to own it.

    A 30% chance of being right means that I should try to avoid the loss and not worry about the potential gain.

    Even if I am right, I might be quick to jump back in. I never really wanted to be forced to exit in the first place. I like TIPS.

    ReplyDelete
  4. Stagflationary MarkDecember 3, 2009 at 7:16 PM

    GYSC,

    I wanted to chart natural gas vs. oil, but I could find data that went back farther in time for gasoline.

    I'd also like to mention that there's been a lot of talk about natural gas disconnects in recent months. I think my favorite example was what Rob Dawg posted on his site on November 18th.

    "Amazing Divergence"

    http://exurbannation.blogspot.com/2009_11_01_archive.html

    ReplyDelete
  5. Stagflationary MarkDecember 3, 2009 at 7:22 PM

    GYSC,

    One more thought and this SHOULD scare the heck out of gold bugs. The bad money is continuing to drive out the good.

    I just saw an ad for another gold coin on TV last night. It is a reproduction of the Gold Buffalo coin. They even showed charts of gold's rise in price over the last few years to lure investors in.

    So what's the problem?

    The coin has 31mg of 24 karat gold in it. That's roughly 1/1000th of an ounce. Yeah, one dollar's worth of gold sure is a hedge against bad times all right, especially since they want $20 for it. Strict limit of 5 per household? I guess they'd feel guilty making too much money off of people.

    Think about that. $20 of actual gold demand only ended up buying $1 worth of actual gold. What a shame.

    ReplyDelete
  6. EconomicDisconnectDecember 3, 2009 at 7:44 PM

    Mark,
    the gold on tv thing is nada, but I look at the GLD buyers and then I look at real gold bullion stores and I am seeing something I do not like. Selling sham wows for $5 is much different than selling $10k in gold over tv, but when the bullion hoard is not the same as the ETF hold I worry.

    See what you have done to me!!!!!!!!!!

    Night all, bed time.

    ReplyDelete
  7. Stagflationary MarkDecember 3, 2009 at 8:17 PM

    GYSC,

    $3.4 billion traded in GLD today (28.9 million shares). Amazing.

    ReplyDelete
  8. AllanFDecember 3, 2009 at 9:27 PM

    I've often wondered about ng liquification. I mean if they can do it for coal, why not for ng? Anyone know anything about the physics on that?

    It's been a long time since I faked my way through organic chemistry, but memory serves the synthesis of adding and subtracting carbon atoms to an N length chain of hydrocarbon molecules is well established.

    methane->ethane->propane->butane?->yada yada yada->octane. I suppose I could look it up on the internet. ;-)

    ReplyDelete
  9. watchtowerDecember 4, 2009 at 4:23 AM

    As of yesterday the gold buyers have set up in one of our sleazy motels.
    This is a first around here, they had been setting up in vacant storefronts (they are still there as of yet) but now it seems as if the late 80's are upon us.
    Makes me a little nervous if you know what I mean.

    ReplyDelete
  10. mabDecember 4, 2009 at 4:42 AM

    I've often wondered about ng liquification. I mean if they can do it for coal, why not for ng? Anyone know anything about the physics on that?

    AllanF,

    FWIW, the NJ Department of Transportation has been running many of their vehicles on natural gas since at least 1991. Also, many types of construction equipment run on propane for many years - very common for fork lifts and other equipment used in confined spaces.

    If oil goes to the moon and NG stays low, I fully expect a conversion.

    ReplyDelete
  11. mabDecember 4, 2009 at 7:03 AM

    Stag,

    Looks like the real yield brick wall was more than just a mirage. ;)

    I hope the sell off continues. I'll definitely jump back in if I see more reasonable real yields on shorter term TIPS.

    I don't need the absolute top or bottom either as I would actually like to be a long term TIPS holder. I just don't want to hold TIPS if they are a crowded short term trade. In my view, it's dangerous to your wealth investing alongside the hot money.

    ReplyDelete
  12. watchtowerDecember 4, 2009 at 9:40 AM

    Make that the early 80's.

    That was the top back then, could it happen now at this time without the Hunt bros involved and the gov running up huge deficits?
    Time will tell.
    When I first bought my PM's I did it for a SHTF scenario, but now with sizable profits there for the taking it is getting harder and harder to hold on.
    If I had something readily available to get into i.e. land for example then I might consider cutting some of it loose, but at the present time nothing has came up.
    Guess I'll stand pat, wouldn't be the first time I've made a mistake nor the last I'm sure.

    ReplyDelete
  13. AnonymousDecember 4, 2009 at 12:03 PM

    The economy is so hot, that democrats in Congress are now moving with yet another stimulus package, this one for $170 billion, targeting bankrupt states and formerly surging unemployment (Obama has some TV appearances today; the BLS will be back to its previously scheduled job collapse next month). In other news, Japan did approximately 10 such small scale bailouts even as its market proceeded to keep probing new lows over the last two decades, and as reinvested 3x its annual GDP in comparable such one-time boosts to the economy without doing anything to prevent its current deflationary collapse.
    http://tinyurl.com/ybb3avv

    LMAO I think, still kind of funny though.
    Word verification = REDLYING
    Kevin

    ReplyDelete
  14. Stagflationary MarkDecember 4, 2009 at 12:13 PM

    Liquefied natural gas

    http://en.wikipedia.org/wiki/Liquefied_natural_gas

    "LNG accounted for 7% of the world’s natural gas demand.[4] The global trade in LNG, which has increased at a rate of 7.4 percent per year over the decade from 1995 to 2005, is expected to continue to grow substantially during next years.[5] The projected growth in LNG in the base case is expected to increase at 6.7 percent per year from 2005 to 2020.[5]"

    We just need to get this global economy unsustainably humming again. ;)

    ReplyDelete
  15. Stagflationary MarkDecember 4, 2009 at 12:14 PM

    watchtower,

    I got a brochure in the mail recently listing off all the local hotels that would accept my gold for cash. I hear you!

    ReplyDelete
  16. Stagflationary MarkDecember 4, 2009 at 12:20 PM

    mab,

    "Looks like the real yield brick wall was more than just a mirage. ;)"

    Yeah, I'm thinking it was a Wile E. Coyote moment.

    Expectations...

    "Euro May Rise as ECB Starts Scaling Back Emergency Measures"

    http://www.bloomberg.com/apps/news?pid=20601085&sid=ai8Krm9xJNcE

    "Dec. 4 (Bloomberg) -- The euro may rise after posting its biggest gain in a month versus the yen as European Central Bank President Jean-Claude Trichet announced the first steps toward scaling back emergency stimulus lending."

    Realizations...

    "Dollar soars vs euro, yen, boosted by jobs report"

    http://ca.reuters.com/article/businessNews/idCATRE5B23RK20091204

    "The euro, meanwhile, fell below $1.49 and headed for its biggest one-day decline since June. By early afternoon trading, the euro was down 1.5 percent at $1.4840, well off a $1.5091 peak."

    ReplyDelete
  17. Stagflationary MarkDecember 4, 2009 at 12:23 PM

    Kevin,

    "The economy is so hot..."

    "Word verification = REDLYING"

    What more is there to say? Hahaha!

    ReplyDelete
  18. Stagflationary MarkDecember 4, 2009 at 12:33 PM

    73.5 million shares traded in GLD so far today. Wow.

    http://finance.yahoo.com/q?s=gld&=

    ReplyDelete