Natural Gas Finally Catching Up

In late 2007, there was lots of talk that Natural Gas was due for a rally because it kept going down even though Oil prices were going up. In the last couple of months, the Natural Gas trade has worked out, as the commodity has moved from the low $5s all the way up to its current level of $8.65. Currently, Natural Gas is trading well into overbought territory -- trading more than 2 standard deviations above its 50-day moving average.

Natural Gas has even begun to outperform Oil in recent weeks. Below is a chart that divides the price of Natural Gas into the price of Oil. The historical average of the Oil/Natural Gas ratio (since 1990) is 9.12, so the current level of just over 11 means Oil is still trading at a slight premium to Natural Gas. But the declining trend line indicates that Natural Gas is currently outperforming. From the looks of the chart, the trend could continue until it gets back to average.

Comments

[Augustus]

Eventually these commodities will trade around the BTU ratios. At the margins they are a bit interchangeable.

On a BTU basis - NG should be about 15% of oil price.
On a long term historical basis NG has been about 10% of oil price. That includes a long period where ND was an unwanted "find by accident" when searching for oil. Now that there is more year round demand for gas and more process demand for gas, the BTU basis should become more of a factor.