What to Make of the Gold/Oil Ratio

Real-time Monetary Inflation (last 12 months): 4.6%

You'll likely hear a lot of talk about gold this morning. Fresh highs were scored by the yellow metal as tensions rose over Iranian war games.

Amid all the chatter, it'll be easy to miss another story. It's about oil. By now you've probably noticed the decoupling of oil and gold prices. The U.S. benchmark grade, West Texas Intermediate (NYSE: WTI) crude, seems stuck below $80 a barrel even while spot gold seems ready to knock on the door at $1,200 an ounce.

Granted, oil's come a long way this year; more than twice as far as gold, in fact. Spot crude's risen nearly 74 percent since New Year's Day, while gold's gained 32 percent. That sent the gold/oil ratio tumbling initially, but now it's dithering at the 14x level.

 

Gold/Oil Ratio

 

There's a lot churning, though, under that seemingly placid oil slick. On Friday, for example, pricing for WTI vs. heavier, more sour North Sea Brent inverted. Normally, WTI commands a premium over Brent because the U.S. grade is easier to distill into gasoline. Right now, though, there's better demand for heating oil than there is for gasoline, making refiners chary of paying up for oil to be used in wintertime refinery runs. There's better money in the middle distillates now. Not a lot more, mind you, but still, who doesn't want to make more money? Refinery margins have been pretty thin this fall, so pennies count. Refiners have been trying to boost profits by throttling back production as inventories are worked off.

But now stocks of crude are backing up at the Cushing, Okla. terminus. That's where WTI is delivered. With the December NYMEX delivery now off the boards, too, spreads between contract months have widened enough to create a bit of a carry market. That is, there's enough contango between the nearby and deferred contract months to make traders consider buying, storing and selling cargoes forward to earn a few extra kopeks.

The carry trade was a real money maker for trading desks last winter. Those kopeks totted up to some real big dollars. Of course, we were awash with oil then.

Could this year's spreads be telling us something? Big traders seem to think so. Producers and users were heavy liquidators of oil future hedges last week - mostly on the long side. Money managers, too, took a lot of oil money off the table as long liquidations led short covering by a 6-to-1 margin.

This should be an interesting week.