"A career is a series of ups and downs, of comebacks." - Steve Guttenberg
With Natural Gas prices rising strongly since about mid-June coinciding with a recovery in Oil and energy stocks more broadly, it seems appropriate to address the "substitute" of coal. A follower on Twitter sent me a request to address how coal stocks might behave within the Summer Surprise call and the reflation theme I have talked about in my various writings online. First, I firmly believe that if I am right that another meaningful leg higher in risk assets is to come shortly (the idea of a melt-up similar to what was experienced in the Fall of last year), it likely gets led by emerging markets and the cyclical trade. This includes commodities broadly.
Within that trade, coal appears to be on the verge of a comeback both relative to the S&P 500 and relative to natural gas stocks. Take a look below at the price ratio of the Market Vectors Coal ETF (KOL) relative to the First Trust ISE Revere Natural Gas ETF (FCG). As a reminder, a rising price ratio means the numerator/KOL is outperforming (up more/down less) the denominator/FCG.
Since 2011, coal stocks have on average severely underperformed natural gas stocks, as the supply boom pushed natural gas prices to historic lows. In turn, Utilities began switching over away from comparatively more expensive coal in electricity generation. However, much of this may be priced in now as energy input substitution slows.
The most recent period of strength may be the start of meaningful outperformance, particularly should China begin to stimulate its economy as I suspect it will. For those looking to play natural gas then, betting on a coalback might make sense.
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