Natural Gas Will Dictate Oil Prices, Not Iranian Sanctions or OPEC

NEW YORK (TheStreet) -- The discussion about Iranian oil on or off the market is a sideshow compared to the platonic shifting in the energy space. Yes, Iranian embargoes by European countries may have a slight short-term influence on world prices, but three years from now it won't even be remembered. Increased European sanctions are scheduled to begin in July.

Iran may have to take less for its oil. However, it's naive to believe Iran will not find a willing buyer. It's simple economics and it trumps the will of politicians every time. All it takes is one consuming nation with the capacity to buy oil on the cheap. It's difficult to even imagine a heavily discounted price as the list of countries willing to buy at a small discount is well beyond the capability of Iranian production.

Countries including India and China may individually totally subscribe to the Iranian production, let alone all the other countries more than happy to expand or begin buying discounted Iranian energy. (Read why I expect oil to fall under $75.)

Moreover, current oil exports from Iran are estimated to be at 10-year-plus lows. Any impact from disruptions in Iranian oil will be small. OPEC's official output target is 30 million barrels per day but most believe OPEC is overproducing now and will continue to do so.

Again, don't expect Iran to close up the lemonade stand and bend to the will of U.S. and Europe. The only real question is if U.S. and European leaders are downright dumb enough to believe what they are doing will have a policy-changing impact on Iran, or if they believe the public is dumb enough to believe it. If both, I would not be surprised.

Tracking Funds

Oil prices are under so much pressure that even after the largest weekly gains this year in the S&P 500 Index ETF SPY ( SPY), oil as represented with United States Oil Fund ( USO) closed marginally higher at $31.80, a gain of 1.1%.

SPY closed near the highs of last week and the previous two weeks, completely erasing the losses from last week. Even so, USO's close was below the lows from two weeks ago and near the bottom of the previous week. With the recent selloff in USO, SPY's rocket move higher was hardly noticed by oil and I wouldn't doubt a piece of paper hitting the trading pit floor was one of the more rambunctious sounds experienced compared to trading SPY. (Read about natural gas displacing petroleum.)

USO appears oversold on the daily chart based on technical analysis but make no mistake, the relationship between SPY and oil is decoupling. USO is circling the event horizon (point of no return near a black hole) and will soon fall in. Not all energy stocks are oversold, and the S&P Energy Select ETF XLE ( XLE) represents energy producers and recently bounced off of lows.


Exxon Mobil ( XOM), ConocoPhillips ( COP), Marathon oil ( MRO), BP ( BP), Chesapeake Energy ( CHK), Sandridge Energy ( SD), Kodiak Oil & Gas ( KOG), Cheniere Energy ( LNG) profit from natural gas, oil and or refined product sales. All companies have international pricing-related exposure, and Europe is likely to continue to drag earnings, but at least provide greater margins. Transportation costs, current shipping lanes and lack of current demand for energy is a recipe for highly variable and localized energy costs.

Exxon Mobil is currently trading near the 200-day moving average, after breaking below for the second time; first in May and now again in June. Also Kodiak, recently off 2012 lows after triggering an oversold signal a week ago, is running into technical analysis headwinds. Cheniere Energy bounced off the 200-day moving average last week, but appears ready to test 2012 lows soon again.

ConocoPhillips is slightly weaker from the May 1 spin-off of Philips 66. Chesapeake Energy certainly has its share of news lately. Because natural gas prices are trading at yearly lows, a lot of volatility can be expected, especially in the near-term before demand ramps higher.

Natural Gas

As oil prices move toward and below $75, natural gas prices will still remain very cheap relative to diesel and gas. Diesel and gas refinery operations, currently in high demand are keeping a greater share of the crack spread, keeping prices at the pump from falling. Refining limitations will distort the correlation between oil prices and pump prices, while natural gas continues to demonstrate price superiority.

Natural gas production in North America gas tracked with United States Natural Gas ETF ( UNG) is part of the reason long-dated oil futures are trading at a discount relative to shorter term contracts. With so much energy available and natural gas at prices comparable to about half the cost of gasoline and diesel, it's just a matter of time before real meaningful conversion takes place.

There are companies dedicated to producing engines and infrastructure to make natural gas refueling stations as common as diesel is today. Clean Energy ( CLNE) has operations in refueling stations, systems, and vehicle conversion technology. Cummins ( CMI) and Westport's ( WPRT) joint venture "Cummins Westport" builds the engines for long haul truck operators and others to use natural gas instead of diesel. Cummins Westport is not alone; both Ford Motor ( F) and General Motors ( GM) are producing vehicles capable of using natural gas as their fuel.

It's Ford and General Motors vehicles that really make the case for falling future gas prices. As companies like Clean Energy produce increasingly more public refueling stations (about half are public), Ford and General Motors will have an easier time marketing vehicles tied to natural gas.

The major automakers are not able to turn on a dime to produce natural gas vehicles and even if they could, there is a refueling location issue (Clean Energy is working full speed along with other smaller companies to solve this issue), but they don't need to start selling the vehicles yet.

As long as the wheels are in motion (which they are) oil prices have little reason beyond temporary catalysts to trade higher. The forward-looking nature of the stock market has impacted more companies as well. (Read why I believe gold is well on its way back to $1,200 an ounce.)

As the cost of energy falls, just about every product in the market will have deflationary pressure. Take a box of macaroni and cheese, for example. The actual food product cost is 30% of the cost of energy into putting the box of food on a grocer's shelf.

Lower energy costs equal greater spending by consumers, in turn lifting corporate profits and lifting the SPY. Natural gas will also allow Ford and General Motors to produce lower emissions and cost to operate vehicles. Expect consumers, the overall market, auto makers and natural gas producers to win and high-cost oil producers to struggle.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication, the author held no position in any stock mentioned, but may enter a short USO and or long UNG position this week.

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