Natural gas prices should jump in the coming months if historical trends materialize, Nick Majendie, a portfolio manager at Canaccord Adams says.
Mr. Majendie points out that over the past 10 years, the price of natural gas surged within six months of the ratio of oil to natural gas surpassing 12.6 times. The ratio most recently breached this level on July 25. It was the fifth breach since August 1998.
“Our observations would be that the average gains of 67% in natural gas prices to the high in the following six months are impressive,” Mr. Majendie says. “However, it should be pointed out that the percentage gains have been sequentially lower on each of the four occasions prior to the latest breach of the 12.6 times ratio.”
Natural gas prices rose 34% gain within six months after the last breach on January 25, 2008. The gain was as high as 96% after the breach of May 19, 1999.
Mr. Majendie says cost inflation and balance sheet concerns appear to have muted the impact of the rise in natural gas prices in related stocks.
“In sum, trading the underlying commodity rather than gassy stocks looks to be a much more defensible and reliable strategy,” he said.