Sunday, May 17, 2009

Natural Gas vs Crude Oil Price Drivers - Yan Yang

1. crude is a Global market while natural gas is a Domestic market. U.S. has no control over crude price since most of oil are produced overseas while, for natural gas, U.S. produces all by itself. In addition. natural gas reserve in U.S. is aboundant. This also explains why natural gas is much more expensive in Europe than U.S. 2. 1/3 of natural gas is for big industrials to produce electricity, fertilizer, steels etc while oil doesn't have such a big share cut out for industrials, rather it's much more evently shared cross-sectionally. For the first quarter this year, U.S. shuts down almost all of its steel mills. Big industrials are in depression mode. This explains falling natural gas prices. Are we betting on a quick recovery of U.S. industrials? 3. Residential demands for natural gas (another one-third) is very seasonal. It takes cold winter or hot summer to boost demands. Most of power producer has natural gas turbines as backups. They usually use coal based turbines because coal is cheap. Whenever there's peak demand for electricity, they turn natural gas engine back on. As result, natural gas market is much more volatile than crude.

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