Oil flies while natural gas dives. Is this evidence of spread trading or is it just a coincidence? On the surface there is no doubt why natural gas tanked. We double topped and then got doubled whammies by the Energy Information Administration larger than expected injection and a report on power and rising coal demand. The EIA reported a natural Gas injection of 43bcfs when they were looking for 28bcfs.
On top of that Reuters reported that the demand for power in the United States in April fell to a three year low because of warmer temperatures in the eastern and western parts of the country citing energy information provider Genscape Inc. Genscape also said coal fired power plants continued to capture market share from natural gas fired units. They report demand Demand in April was down 8% from March and 1% from the same month in 2012. Year to date demand is now up just 1% from last year, Genscape said. Coal power generation continues to take back market share from gas that had been lost in 2012. Henry hub prices are up more than 100% year-on-year while Genscape estimates delivered coal costs have only increased.
Yet while those fundamentals are clearly bearish, was the size of the move exasperated by the fact the crude oil prices soared? One of the questions that we have been asking is whether natural gas acts like a risk-on versus risk-off commodity. Is natural gas a safe-haven? And did oil accelerate versus gas as traders unwind spreads?
Oil also had its own obvious reasons to rally. The day after the Energy Information Administration reported that US crude supply hit 82-year highs crude soared as natural gas prices tanked. Oil struggled to rally even after the Fed seemed to signal that it was downplaying talk of an exit strategy and that there were downside risks to the economic outlook and is prepared to increase or reduce the pace of its bond purchases influence the economy. Gold soared after the Fed but oil was reluctant because of the massive supply.
Then it was Mario Draghi turn. As expected the ECB lower rates to a record low and acknowledged that downside risks to the economy remain. But what juiced the market was that Mr. Draghi, upset that his banks lack the confidence to lend money, would force them by charging them a negative interest rate. In other words the banks have to use it or lose it. The ECB would charge them to hold money thereby inspiring the banks to take more risks in lending. If they don't, the money would erode both in real and nominal terms. Of course if this threat inspires lending it would increase oil demand and that is indeed bullish for oil. Even as European Central Bank Governing Council member Ewald Nowotny downplayed the situation the move was already made.
Oil also accelerated on reports of a referring to a catalytic cracker outage at CVR Refining 70,000-barrels-per-day refinery in Wynnewood, Oklahoma. A glitch that can improve margins and have refiners pay up for higher yielding crudes.
Of course that brings us back to the question, does Natural gas act as a safe haven as in risk-on and risk-off? Obviously natural gas had its own reasons to fall and oil had its own reason to rise. The oil reasons had more to do with central bank actions increasing demand expectations with aggressive monetary policy despite near record supply. If oil is being driven by economic policy, then is natural gas a hedge alternative? Or is it just another coincidence? We report, you decide. Hey wait, I think someone is already using that.