Oil and Gas Diverge as Inventories Move in Different Ways

(Bloomberg) -- Crude oil and natural gas prices are moving in opposite directions, with traders in both markets spooked by inventories.

Supplies are looking too plentiful for about six months in the global oil market, while gas storage sites in the U.S. are not as full as usual as colder weather begins to lift demand, according to Carsten Fritsch, an analyst at Commerzbank AG. U.S. gas surged at the fast pace since 2009 Wednesday. In Europe, the Dutch front month gas contract is 11 percent off its highs in September, reflecting a little more supply.

Oil and Gas Diverge as Inventories Move in Different Ways

Inventories of oil in industrialized nations have increased for four straight months and are set to jump by 2 million barrels a day next half if current output is maintained, the International Energy Agency said in its monthly report.

Once linked by pricing formulas that tie gas prices to oil, the two markets are increasingly diverging with the development of gas futures trading and the spot LNG market. The result is that gas prices both in the U.S. and Europe aren’t following oil and coal lower -- for now at least.

“People realized that oil-gas contracts are not competitive,” said Wayne Bryan, senior European energy & commodity analyst at Alfa Energy. “Big users moved away from
oil, so there is no reason to move back to those contracts again.”

The well-supplied nature of the oil market is “pretty certain unless OPEC comes up with a substantial supply cut in early December,” Fritsch said by phone. The return of more normal weather in the U.S. may well depress prices in the nation’s gas markets, he said.

The oil market has become more sensitive to levels of economic production than gas, because renewables are taking market share in the power-generation industry and causing a glut of capacity during the energy transition, said Norbert Ruecker, head of macro and commodity research Julius Baer Group.

Petrochemicals, passenger cars and freight transport are all driven by economic output, “so oil is a much more GDP-sensitive commodity than gas is.”

©2018 Bloomberg L.P.