Oil and Natural Gas Correlations Are Breaking Down (UNG, USO, XOM, DIG, DUG)

Jonathan Yates: The traditional relationship between oil (NYSEARCA:USO) and natural gas (NYSEARCA:UNG) has broken down in recent trading. Part of the issue is relative supply and demand of these once tightly linked commodities. Another factor is speculation.

UNG and USO Oil Price Correlation

For most of 2011, and history, oil and natural gas have followed the same pricing trajectory. That makes sense, since both commodities are utilized to meet the energy needs of consumers and companies. Gas is almost entirely replaceable for oil, and the two commodities are often produced together.

However, the exchange-traded fund for natural gas, United States Natural Gas ETF (NYSEARCA:UNG) is now at a 52-week low and is down almost 30% for the quarter, as detailed in a previous article on www.emergingmoney.com. By contrast, the exchange traded fund for oil, United States Oil ETF (NYSEARCA:USO), is more than 30% above its year low and up almost 25% for the quarter.

Back in the summer of 2008, oil and gas were reaching peaks together, as noted in a Wall Street Journal article by Dan Strumpf and Ryan Dezember, “Natural Gas Falls to Two-Year Low.”

The relative strength index ratings of each fund adds additional weight to the idea that the trading relationship between USO and UNG has broken down.

At present, United States Oil has a relative strength index rating of 53.59. United States Natural Gas ETF (NYSEARCA:UNG) has a relative strength index rating of 20.84. Any RSI above 60 indicates that a security may be overbought while a RSI below 30 can be considered oversold.

As ExxonMobil (NYSE:XOM) CEO Rex Tillerson testified before Congress last year, oil should be around $60-70 a barrel based on demand. While massive gas supply is coming online in North America and throughout the world, comments like these — from industry giants — point to an extra-fundamental factor at work.

Speculators are driving oil and gas apart.

Written By Jonathan Yates From Emerging Money

Emerging Money provides insightful and timely  information about the increasingly important world of Emerging Market  investments.  CNBC Emerging Markets Contributor Tim Seymour leads the  team of Emerging  Money to bring you cutting edge global news and  analysis.

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