April 1, 2002; Oil Moves Ahead

Six-year oil price advanced another 1% to $23.05 from $22.74.  Six-year natural gas price receded 2% to $3.76 from $3.83 in the short week ended March 27 (see Chart). 

The surprisingly strong move in 12-month natural gas that got going in February and accelerated in March may have ended for now.  Nonetheless 12-month natural gas is still less than 72-month natural gas.  In turn 72-month natural gas does not have any of the premium to 72-month oil that it may eventually command.

The futures market says 12-month oil is temporarily high relative to 72-month oil.  That fact should remind us of possible vulnerability to some decline.  Yet the futures market for oil usually is in backwardation meaning that the current price is usually above the long-term price.  Moreover, in our opinion, the long-term price of oil is fundamentally cheap at $23.05 per barrel for light sweet grade at Cushing, Oklahoma.