A Cyclical Perspective on the Crude Oil/Natural Gas Ratio

• Posted by Greg Harmon
• on April 21st, 2011

Crude Oil has been on a tear higher since late 2010 and is a major source of conversation. But as Crude Oil has been rising the price of Natural Gas has been falling. This seems counter intuitive as many believe they should be substitutes to some degree. I have written about the ratio between Crude Oil and Natural Gas in the past on a longer term scale, but with the current environment it is time to take another look at it. Below is a chart of the ratio of Crude Oil to Natural Gas for the last eight years.

The peaks are highlighted by the vertical lines. Notice the time between the major peaks is roughly seasonal at about 1 year. Focusing in on the period since September 2009 shows that the minor peaks also occurred at 34 weeks, 28 weeks and then another 34 weeks for the full 93 weeks to the current high, since the last major high. 34 is a Fibonacci number and 93 is close to 89 another Fibonacci, look at the peak 4 weeks earlier. The pullbacks from the major cycle highs have been between 30% and 66%. Additionally the pullbacks from the minor tops have been between 20% and 30%. Each move has gone at least as far as the 50 week Simple Moving Average (SMA) with all but one getting to the 100 week SMA.

If this cycle analysis holds going forward then this was not a major top and a peak is not due in the ratio until September. That would suggest that the current pullback is a minor one. It could pullback to where the rising trend line meets the 20.59 Fibonacci level and 50 week SMA which would be a 27% pullback. Beyond that a pullback to the 100 week SMA would be a 33% pullback. Both of these would fit within the range of the minor pullbacks.

From December: Looking Ahead: Crude Oil and Natural Gas

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