The energy equivalency of natural gas compared to oil is generally 6,000 cubic feet to one barrel of oil, and the price for 1,000 cubic feet (1 Mcf) will generally trade for one-sixth of the price for one barrel of oil during normal times. As you are well aware, we are definitely experiencing anything but normal times in the current environment.
Over the past two years oil has traded for about 10 to 12 times the price of natural gas. With current prices for oil at about US$61 per barrel and natural gas at about US$3.40 per Mcf, the ratio is almost 18 to 1. Natural gas prices stand to benefit from closing the gap in pricing relative to oil prices.
Natural gas prices have spiked twice in the past four years and accompanied spikes in oil prices – in 2005 after hurricane Katrina hit Louisiana and during last year’s run-up in prices. Another price spike could occur when the supply-demand outlook improves.
An opportunity to benefit from a recovery in natural gas prices, particularly a price spike, is through the United States Natural Gas Fund (NYSE: UNG, Stock Forum), which invests in near-month natural gas futures contracts.
In the chart below note the significant downtrend in the price of UNG over the past year. The downtrend is still intact but the price is ripe for a breakout later this year, which could set the stage for a significant trend reversal.