If there is one ratio in the commodities market that completely out of whack, it has to be the price of crude ($wtic: chart) to natural gas ($natgas: chart).

From 2000 to the end of 2005 the ratio of the crude oil price in $/bbl to the price of natural gas in $/MMBtu was around 7:1.

Today, that ratio is a little over 18:1.

The price of crude oil started its ascent towards record highs in 2006, and natural gas supplies started creeping upwards, also to record highs about that same time.

If one were thinking about the ratio alone, you’d surmise that either crude prices need to fall or natural gas prices need to rise to trend back towards that 7:1 ratio.  The problem with this logic is that crude and natural gas now contend for markets with drastically different scopes.

Crude is truly a global commodity as evidenced by the geography of the crude reserves and the intercontinental demand for the black gold from the Middle East.  Natural gas on the other hand is very localized, and this is due primarily to the transportation and infrastructure differences between the two energy resources.

Natural gas is relegated to pipeline transportation (with the exception of limited LNG movement via ships) whereas crude oil is fit for pipelines, freighters, tankers, rail…

So you can start to see the conundrum.

The holy 6:1 ratio (based purely on energy content) is not so holy any more, and natural gas and crude have devolved into completely unrelated markets.

For now.

I suspect that if we continue to see natural gas supply levels stay up, and prices stay low, that more and more industries will shift to natural gas for purely economic reasons.

I predict that natural gas draws will start increasing this winter, and the price will reflect that.

As for the ratio, I suspect it will start to moderate, but not because crude oil prices start retreating.

Energy crude oil, crude to natural gas ratio, natural gas

The Organization of Petroleum Exporting Countries (OPEC) decided to hold out against further production cuts at today’s meeting, and resolved to enforce compliance with existing reductions.

Obviously dealing with crude oil ($wtic: chart) production is a double edged sword.  Cut production in an effort to drive up prices, and you risk cutting demand even further in these fragile economic times.  Leave production alone and prices could fall further, cutting the economic incentive to bolster reserves.

OPEC has claimed that crude oil prices in the range of $50 to $60/bbl would be ideal, which is down from the $70-90 range that OPEC’s secretary general Abdalla el-Badri levied as appropriate at the end of January.

One positive aspect of a lower price range is that production with higher lifting costs will be shut in, further helping moderate the industry financials as s whole.

The next meeting is in two months on May 28th where the supply-demand analysis may be a bit more clear.

Oil & Gas crude oil, energy markets, energy prices, OPEC

I can’t help but think that with all the money the Government is dumping into the economy, particularly money we don’t have and must borrow or print, that our country is due for some serious inflation in the somewhat near future.  You can’t dump trillions of extra dollars into an economy and expect the value of the dollar compared to the cost of goods to stay the same.

So, in my macro-economic scope, if this is what’s coming, how can I capitalize on it?

If you believe that inflation in our country is around the corner, where can you put money to either hedge against the negative trend, or perhaps increase your return?  To answer that question, you have to understand what inflation really is in order to know where to funnel your money.

What Does Inflation Mean?

Inflation is the rate at which the general cost of goods and services compares to purchasing power for those goods and services.  For instance, if the value of the dollar goes down and the intrinsic value of, say, toilet paper stays the same, it will take more dollars to buy toilet paper with rising inflation.

There are lots of things that could devalue the almighty dollar, and directly diluting the value by printing more money is one of them.  If you put it in investment terms, it’s a bit like diluting stock by printing more shares to raise capital.

To be certain, sometimes diluting stock or currency can be a good thing so long as the return on that money is greater than the cost of borrowing the money in the first place.

So how do I hedge against inflation?

Gold.

Gold has been the time-tested and preferred hedge against inflation when markets panic and governments try to “help”.  The reason?  Gold is the universal currency that holds its own value.  Sure, it’s valued in US Dollars on the open market, but since its accepted as a form of payment around the globe, the real value of the precious metal precedes the US currency.

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Economics, Investing crude oil, GLD, hedge, Inflation, investment, TIPS, treasury