Wednesday, June 14, 2006

Further evidence of future oil price decrease

A rising anomaly is evident in the pricing differential between US oil futures and Natural gas prices.

A barrel of oil has about six times the energy content of a thousand cubic feet of natural gas. Although they're far from perfect substitutes, some firms can move between oil and gasdepending on price and availability. Longer term, consumers or firms making a fixed commitment to oil or natural gas will of course look at the relative prices. Thus one's first guess might be that, over the long run, a barrel of oil should sell for something around six times the price of a thousand cubic feet of natural gas.

The graph below shows that this has been a pretty fair description over the past six years. Up until the last few months, that is, which have left natural gas selling for about half its value from December, while oil is little changed.

Whilst there are some factors such as seasonal differentials,the rapid uptake of LNG in the transport sector will see further pricing constraints on oil.

In addition substantial oil requirements for China is expected in 2007-2008 as fuel oil for electricity generation is substantially lessened due to completion of gas ,hydro,and nuclear power plants equivalant to Spains total electricity complex each year for the next 5 years.

Around 30 % of oil is use in electricity generation in China,in some regional areas such as Guangdong up to 70%.



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