SP Weekly Chart

Natural Gas and Crude Oil: An Interesting Spread to Watch

The spread between Natural Gas and Crude Oil is now at an 18 year record low.

Nat gas has fallen from $13 to $3 while Crude Oil soared to $70.

Either crude is incredibly frothy, or natural gas represents an outstanding bargain.

A few years or so ago I published a fairly comprehensive study of the seasonality of natural gas, and some relative relationships with demand and supply. I will look for it, and see if I can update it. Since I no longer trade the futures I have not looked at this in some time. But I do remember the spreads and saw this one grown shockingly wide.

My first thought is that oil has been driven higher by monetary inflation and speculation, which are in some ways the same thing. Hot money craves beta and drives the prices of real assets to extremes.

Keep in mind that if enough people get in on this trade, the market makers who can see your aggregate holdings will use it to skin the speculators, without regard to fundamentals in the short term.

It's never easy.

SP Hourly Futures Chart at 2:30 PM

The SP futures are climbing the trellis of a reflationary ramp on thin volumes.

Although we would not suggest stepping in front of it, and certainly not seriously shorting it until the trend is broken, nevertheless the move has all the feel of artificiality and will meet its test when earnings start coming out for Q2.

From what we have seen on the fundamentals of earnings, stocks seems very fully valued here, and would not be looking for a great deal of upside, particularly when the banks finish their price manipulation to support their equity offerings to pay back their TARP funds.

"There is something wonderful in seeing a wrong-headed majority assailed by truth." John Kenneth Galbraith