Steve Mauzy: Natural gas (NYSEARCA:UNG) has always been less expensive than crude oil. But today, the market is putting a huge value on crude while considerably discounting natural gas.
That discrepancy creates a ripe profit opportunity for investors who love to buy low, and sell high. Let me explain…
Natural gas, trading at $3.60 per million Btu (MMBtu), is trading at a historically low price. Specifically, natural-gas is priced low – very low – relative to oil.
This is good news for anyone interested in buying low. Natural gas is morphing into an oil alternative, which makes the spread between the two energy sources extremely compelling.
The spread between West Texas Intermediate crude and natural gas is near a historical high. The spread, currently at 28, means a barrel of WTI crude costs 28 time more than one MMBtu of natural gas.
The spread was higher only once before – back in 2012. And that was a true outlier. Natural gas prices had pushed below $2.00 as new fracking technologies led to an unprecedented increase in natural gas supply, which swamped the market and crushed the price.
Natural gas at $2.00 is unprofitable for everyone. Producers – being rational agents – naturally cut production and natural-gas prices quickly recovered.
I see little impetus for natural gas to challenge last year’s low. I say that because the breakeven price for producers in the most efficient shale properties is between $3.25 and $4.00. When natural gas falls below $3.50, producers reduce production. And this creates a “floor” for the price of natural gas.
On the other side of the coin, West Texas Intermediate crude continues to hold above $100. And that’s likely to continue.
WTI crude demand is surging due to the ongoing fracking expansion. At the same time, it’s become evident that the OPEC nations are less able to serve growing global demand due to geo-political disintegration of the Middle East.
In short, both natural gas and WTI crude have a price floor neither is likely to break.