Energy’s Grand Divergence

Take a look at the long-term charts of crude oil and natural gas.  The historical oil-to-gas price ratio had ranged from 6:1 to 10:1 before the economic crisis.  Since one barrel of oil contains the energy equivalent of the 5.825 million BTU of natural gas, an implied BTU arbitrage kept this relationship in check.

Spot natural gas traded as low 1.905 earlier in the week implying an energy equivalent price of a barrel of crude oil of $11.10.  Spot crude closed at $105.23 on the same day.

Such a sustained divergence caused by new extraction technologies, such as fracking, is sparking the next “new big thing” as industries evolve to arbitrage the energy content of both fuels.  The market sniffs this and the reason the stocks of Westport Innovations (WPRT),  Clean Energy Fuels (CLNE), and Cheniere Energy (LNG) have been flying.

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