Energy Musings - August 25, 2025
We found several charts last Friday dealing with energy to be interesting and thought-provoking.
Charts That Make You Think About The Future
We always find charts interesting. In some cases, they make you think about current issues differently. Other times, they create false narratives because they are either misused or created mistakenly to advance a particular narrative. Every morning, we read an email column written by a seasoned commodities trader to gain a perspective on what to expect during the day’s stock, bond, and commodity trading. Last Friday, we found two charts (topics) in his column to be particularly interesting because they dealt with the energy market.
As a trader, he is interested in the economic data being released that day, since data that surprises or confirms investor expectations will impact markets. Because no government data was being published on Friday, the investment focus was on what Fed Chairman Powell would say in his talk at the Jackson Hole conference. Would he signal an upcoming rate cut, or would he argue that inflation remained a greater economic threat than the weakening labor market?
The only data release the trader mentioned was the Baker Hughes rig count due at 1:00 pm Friday. We smiled as we recalled times in our career when this was one of the most widely watched weekly data releases, often reported on the evening TV news! Its importance lay in providing a perspective on the health of the domestic oil and gas industry and the direction of oil and gas prices.
The column contained the following chart of the weekly rig count for the past year. That afternoon, Baker Hughes reported that the active rig count declined by one to 538. The idled rig was drilling for oil, which reduced the total of oil-directed rigs from 412 to 411. The natural gas-directed rig count remained stable at 122.
The chart, however, was interesting since it shows that the rig count peaked at 593 during the third week of March. The oil rig count had peaked a month earlier at 488, but had only declined by two rigs over the following four weeks. The rig count activity was being focused on because we were in the early days of the drill, baby, drill administration of Donald Trump. The mantra has had little positive impact on oil drilling, as the oil rig count has fallen by 75 since its peak. The week the oil rig count peaked, the natural gas rig count was 102. It reached its peak at the end of July at 124, and has since dropped by two.
Oil prices had been in the $70s a barrel in January, but began to slide during February, falling below $70 at the start of March. Concern about the global oil glut was weighing on prices, so producers became cautious. Additionally, there was talk that the Trump tariff policies might cause a recession that would surely cut oil demand. On the other hand, natural gas demand remained steady, with prospects for growth driven by the projected surge in electricity demand from data centers and the increased use of Artificial Intelligence algorithms. Moreover, the Trump administration was reversing the Biden administration’s LNG export terminal pause, assuring that more LNG supply would be available for global gas markets. The story lines for oil and gas remain in place; thus, we will not be surprised if weekly drilling rig count changes remain benign into the fall and winter months.
Drill, Baby, Drill has done little to help the rig count.
The second interesting chart showed the ratio of oil and gold prices. Gold prices have been very strong this year, but they have been vacillating around the $3,400 an ounce level for the past four months.
Here is a chart of how gold prices have traded for the past 15 months. Note that gold prices have climbed from just under $2,800 an ounce at the start of the year to over $3,500 before settling into this relatively flat price period. Gold prices likely reflect concerns about geopolitical tensions, the massive debt levels of governments around the world, and worries that the U.S. dollar might lose its reserve currency status, shaking up the entire global financial structure.
Gold prices soared early this year but remain stable now.
But the interesting chart is the following one, which relates the futures price of oil to the futures price of gold. The chart shows how the ratio spiked in the spring when gold prices were soaring and crude oil prices started to slide. Since then, the ratio has declined somewhat. Here is the observation of our commodities trader. (Don’t invest based on this information.)
“At 53 barrels of October WTI to the ounce of December gold, I think gold is too high, and crude is too low. Something has to give. Either gold falls, crude rallies, or both move closer together. Maybe 40 barrels to the ounce is the first stop. Again, this is just information to toss into the blender of managing your risks. File it under… Good to know.”
Whither gold and oil prices?
A chart such as this, coupled with the observations of a seasoned trader, is worthy of pause. He admits he doesn’t know which commodity’s price might move, nor by how much or in which direction. What he sees is a wide disparity in a relationship that historically has not demonstrated such a high level (note the trend in the May 2024 to January 2025 ratios). As a trader, he appreciates that historically high ratios or prices are poised to return closer to their past normal levels. He can’t predict when or if it will happen, but history suggests something will change. He is mindful of the saying, attributed to economist John Maynard Keynes, who also happened to be a successful stock market investor. Still, researchers say it might have been economist A. Gary Shilling, who said, “The market can stay irrational a lot longer than you can stay solvent.”
Stock and bond markets tend to experience cycles – repeating past patterns. We have also been in an investment world where “buying the dip” has proven to be a successful strategy. All major stock market indices have hit historical highs this year despite all the negative news and geopolitical concerns. Studying investment market patterns is why stock market technical analysis exists. Identifying evolving trading patterns similar to past ones can provide an investment edge or serve as a warning to avoid speculative situations.
In the oil-to-gold situation, both prices may move, or only one. Betting on one commodity to move is speculation. Many traders hedge their bets by buying and selling both commodities, placing a slightly higher wager on one compared to the other. The higher weight reflects the trader’s expectation for which prices might move the most in the near future.
We tend to agree that both prices will change. Still, we won’t know until we see how global economies progress, how governments address their high debt level challenges, and if there is a worldwide financial system upheaval, with the value of the U.S. dollar falling. All of this gives us something to ponder.