Ratio of Oil to Natural Gas Falls

Back in late July, we highlighted that oil was significantly outperforming natural gas and that "either oil had further to fall or the selloff in natural gas was overdone." Since then, natural gas has significantly outperformed oil, even though both have fallen. Below we highlight the ratio of oil to natural gas since 1990.

When the line is rising, oil is outperforming natural gas, and vice versa for a declining line. Back in July, the ratio got to its highest levels in years, and since then, the ratio has come in quite a bit. At the moment, the ratio is just slightly lower than average, and it needs to fall quite a bit more before a major reversal would be expected. As shown in the bottom chart below, natural gas is down 26% year to date versus a 53% decline in oil.

click to enlarge

Comments

[Greg Pinelli:]

Investors have to be careful when using ratios..I use them quite a bit..but watch those conclusions! The gold/silver ratio tells us that silver is vastly underpiced..and that helps explain (in part) why the premiums are so high. Holders of silver won't sell..Gold..given the liquidity ready to shoot thru the financial system is hardly overpriced.
The oil/gas ratio is more a reflection of two staple fuels having gone thru severe declines..However...ga... looks good only relative to oil's horrific bashing..My guess on how to play this one?..Buy oil. Nat gas is also too low to sustain production..and it's politically favored. Not a bad buy either..UNG looks cheap.

2008 Dec 14 01:33 PM

[smurphny:]

This is not surprising. Oil and NG are mostly different commodities. It MAY suggest that oil IS oversold but I wouldn't bet on it. The longer term charts seem to suggest that, eliminating the irrational spike in '07, oil is still above it's long term average while gas is about where it should be and maybe a little below it's return to reality.

2008 Dec 14 02:13 PM

[MILESCFA:]

The well-known commodity newsletter writer Dennis Gartman also recommended a long natural gas, short oil position (implied by Bespoke). There's only one problem: UNG and USO are both hard-to-borrow and there are not any decent alternatives that I can find (let me know if you have them). So unless you're trading commodity futures, the article doesn't help make me any money.

2008 Dec 15 10:37 AM

[TERN:]

Exess production of oil and oil products need to be stored at considerable expense.
Tank farm operators are doing well in these times.

Natural gas, when not in demand, stays cheaply in the ground.

2008 Dec 18 07:59 PM

[SymS:]

Just seen this thread as I was looking for the oil to natural gas ratio. What a difference 6 month make! The ratio is now over 18. Probably a good entry point for natural gas.

Jun 09 10:30 AM