There are several reasons to be more bullish on natural gas than on oil right now.
- Chesapeake Energy Corp. (CHK) announced plans to cut natural gas production further while also resuming some oil production. When producing natural gas becomes uneconomical and enough production is cut, prices will eventually have to rise. If production of oil is resumed after being previously cut, then it likely means that the production of oil is becoming economical again.
- The Oil/Natural Gas ratio is almost as high as it ever reached since 1994 (all the historical data I could find). When the ratio has reached the level it is near now, natural gas has always outperformed oil. This does not mean that natural gas prices rose, they just outperformed oil.
- Industry insiders are confident that natural gas prices will rise. MarketWatch reports what Chesapeake Energy Corp. CEO Aubrey McClendon said at the Independent Petroleum Association of America.
McClendon said natural gas prices -- which have dropped to below $4 per thousand cubic feet from more than $13 during the height of the bubble -- will return to $7.50 to $9.50 possibly by the end of this year.
The higher prices will provide economic incentive for drilling to meet demand, he said.
He said he remains as confident of a price turnaround as he did in 1999, when commodity prices began a steady march upward for years, based partly on his assessment for long-term demand for fuel.
The easiest way to be long natural gas is by buying the United States Natural Gas Fund, LP (UNG) or the iPath Dow Jones-AIG Natural Gas Total Return Sub-Index ETN (GAZ). Their price performance is nearly identical, but the iPath ETN is much less liquid than the ETF.
Disclosure: Slight long position in natural gas through DJP
