The Bubble that Popped in the Oil to Natural Gas Ratio
- Posted by JC Parets
- on May 16th, 2012
Can we discuss this bubble that popped in the Oil:NatGas ratio a few weeks ago?
We’ve been talking about this for a long time. But even more so recently as the bubblicious ratio was reaching historic and unsustainable levels.
Look at this thing crashing before our very eyes:
The Crude Oil to Natural Gas ratio peaked just above 54:1 on April 19th. Today, with Oil at $92.69 and NatGas at $2.62, we’re looking at about a 35:1 ratio. This represents a 35% move in under 4 weeks. We’re already beyond a 50% retracement from last year’s lows and prices in this ratio are falling fast.
Nothing lasts forever and when these bubbles pop, they can get ugly.
So as our boy Johnny Keynes would ask, ‘Can markets remain irrational longer than we can remain solvent?’ Yes. And during bubbles like these they usually do. In this case, it probably did for a lot of investors.
But going forward, I don’t see any bottom in sight. The average over the last 20 years has been a 10:1 ratio. We’re no where near that. More importantly, as technician John Roque always puts it, “We’re in a reversion beyond the mean business“. In other words, when prices mean revert, especially after being this extended, they tend to trade beyond historical averages. In this case, I would not be shocked to see single digits.
These price targets are purely speculation, obviously. It doesn’t even matter how low I think it goes because we’re no where near those levels. But the point is: The bubble has popped and the path of least resistance is lower.
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J.C. Parets is the Founder & President of Eagle Bay Capital, LLC. He earned the Chartered Market Technician designation (CMT) in 2008 and now actively manages money incorporating Technical Analysis and Behavioral Finance into his practice More
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