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WTI Crude Prices Could Do A Nat-Gas (i.e. Take Swan Dive)

December 11, 2012 3:30 PM EST
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In April of 2012, increases in North American production caused natural gas prices to decline to multi-year lows below $2 per million btu, and since then prices have made only a modest recovery as production and storage levels remain high.

WTI crude oil markets are much tighter than natural gas and less regional, but the dynamics are very similar and there is risk WTI prices could suffer a similar fate, think analysts at Bank of America Merrill Lynch.

"With North American producers now rotating away from natural gas and into crude oil, we are increasingly concerned that this dynamic is repeating itself in WTI and other regional crude oil markets," the bank said in its 2013 global market outlook report.

"US natural gas and NGL prices have drastically decoupled from international prices in recent years due to fast-growing production... but the dynamics are very similar and there is a risk that both export and infrastructure constraints could isolate North American crude markets over the next 24 months," said the bank.

While not the base case, given the right scenario analysts fear WTI could drop to $50 per barrel, mimicking natural gas's dramatic price decline.

Related commodity ETFs include:

United States Oil ETF (NYSE: USO), iPath S&P GSCI Crude Oil Total Return (NYSE: OIL), ProShares Ultra DJ-UBS Crude Oil (NYSE: UCO) and United States Natural Gas Fund ETF (NYSE: UNG).

WTI futures trade at $85.75 per barrel late on Tuesday.


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