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

I’m starting to buy Provident Energy Trust (PVX: chart, web, Y!) again in small bits and pieces.  Natural gas ($natgas: chart) is holding its own even with rising temperatures, mostly due to increased use in electrical power generation.

I’ve also noticed that with the advent of LNG technology (liquified natural gas, where they cool the stuff off so much it turns to a liquid, thus facilitating shipping) we’re starting to see natural gas traded more on a global market.

It used to be that natural gas markets were very focused due to the infrastructure required to handle the gas.  Now that it’s exportable, I think we’re seeing natural gas prices start to increase due to a more widespread market demand…

At any rate, I don’t see natural gas prices coming down anytime soon, at least not to the levels we’re used to at this time of year.

Energy, Investing energy markets, natural gas, provident

Last Wednesday, Provident Energy (PVX: chart, web, Y!) came out with their 2007 year-end and Q407 report, and also provided an update on reserves.

All around a positive report, and I’m curious as to why the stock dropped almost a dollar in two days on a fairly bullish report. The only thing I can think of is that crude oil ($wtic: chart) dropped $6 and natural gas ($natgas: chart) prices waned almost a dollar in those same two days will a lot of money fleeing commodities.

A few highlights from the report:

• The payout ratio in the fourth quarter of 2007 was strong at 57 percent, down from 64 percent in the fourth quarter of 2006. Full year payout ratio in 2007 was 77 percent, up from 67 percent in 2006.

• Consolidated funds flow from operations increased 8 percent to $468 million ($2.04 per unit) compared to $433 million ($2.20 per unit) in 2006. Consolidated earnings before interest, taxes, depletion, depreciation, accretion and other non-cash items (EBITDA) was $545 million in 2007, an increase of 10 percent compared to $496 million in 2006.

• Consolidated upstream proved plus probable reserve life index (RLI) increased from 12.4 years to 16.9 years, reflecting the increasing quality of the assets and the sustainability of the Trust. Provident’s Canadian proved plus probable RLI increased 24 percent to 9.7 years. Factoring in the long-life midstream assets, Provident’s economic life on a consolidated basis is now approximately 18.5 years.

• On a consolidated basis, Provident drilled 159 net wells with a 99 percent success rate while in Canada 103 net wells were drilled with a 98 percent success rate. Provident’s drilling activities in 2007 were focused primarily on crude oil.

• Consolidated proved plus probable oil and gas reserves increased 111 percent to 322 million barrels of oil equivalent (boe). Canadian proved plus probable oil and gas reserves increased 37 percent to 101 million boe.

I like the fact that Provident is actively increasing their reserves at a rate of nearly 13 times the annual production, thereby procuring the longevity of the trust. I suspect that many of the CANROYS were brought down by the sell off in oil the last few days, and this only makes PVX look more attractive.

We’re moving into the lull for natural gas consumption: the period when demand drops due to increasing temperatures, and right before demand increases due to… well, increasing temperatures. With crude still above the $100 mark, it’s more attractive to use natural gas to generate electricity. Consequently, you’re seeing the price of both the commodity and the associated stocks drop.

If PVX continues to drop below $10, it’s going to be tough to not pick up a few more shares.

Energy, Investing, Oil & Gas, Stock Thoughts commodities, crude oil, natural gas, PVX