"I am a little puzzled about the apparent divergence in the price action of the two energy commodities at the moment. While crude oil has been ranging, possibly prior to a break to the upside, Natural gas has been in a pretty consistent downtrend for the last 3 months. Can all this be explained by the new source of nat gas in shale?"

Eoin Treacy's view Thank you for this interesting question. We have been saying for nearly two years that shale gas was a game changer for the energy sector because it contributes an abundant source of cheap, accessible domestic US supply in an environment where the cost of production has otherwise been on an upward trajectory. Oil is currently trading close to a record high of nearly 25 times the price of natural gas. Coal is at its most expensive relative to natural gas in at least 10 years. Such extreme valuations have repercussions.

It is questionable whether natural gas production is economic at today's rather paltry $3.50. Therefore it is reasonable to assume that the rig count will be decreasing rather than increasing as cost pressures hit marginal operations. Right now, supply is abundant but prices are competitive with just about every other energy source. The argument for substitution has seldom been so compelling and we can assume that those who can will have already made the switch. At such extreme levels, the risk that the above ratios might pull back has increased considerably, particularly in the event of a continued US Dollar rally.