As Oil Soars, Natural Gas Is a Bargain (Musical Tribute)

Something Wicked This Way Comes


Do yourself a favor. Start the video and listen to it as you read the following. It should put you in a suitably creeped out mood.

As Oil Soars, Natural Gas Is a Bargain

As oil prices surged over the last few months, natural gas prices in the United States did something that could help to cushion the economic shock. They fell.

Oops. That's a headline from November of 2007. Sorry about that. The surging oil prices combined with the plummeting natural gas prices must have created a déjà vu condition in my synapses.

Oh well. While I'm strolling down memory lane might just as well see how the predictions from 2007 panned out. The economic shock being cushioned theory mentioned in the article was ever so slightly off base. The recession/depression began the very next month and we're STILL in it apparently. Since the headline looks just as applicable now as it did in November of 2007, I'm left wondering if something wicked this way comes. Again!

At the end of 2006, oil for delivery in February 2008 cost $67.18 per barrel, while natural gas for delivery then was selling for $8.90 per million B.T.U.’s.

Forget $8.90. The "Henry Hub Spot" price for natural gas is now just $1.88 (see below). No kidding! Imagine not being able to make money off of a seemingly sure thing "natural gas is a bargain" headline like that.

The fact that natural gas prices have not risen could be good news for the American economy, which has been troubled by reports of slowing retail sales as home prices fall.

Just look at how well the American economy is doing now. We slid right into deflation and are still trying to claw our way out of it. The unemployment rate is now 9.7%. Apparently even much cheaper natural gas didn't help all that much.

Oil and Natural Gas: Ratio Explodes in 2009

Now, with oil spiking to its highest level this year and natural gas plummeting to a 7-Year low to below $3/mmbtu, the current ratio of WTI/Henry Hub price is close to 25 to 1, a historical high.

According to Bloomberg, The Henry Hub spot price for natural gas is now just $1.88. The WTI Cushing spot price for oil is currently $68.02. By my math, that puts the ratio at a whopping 36 to 1. What could oil investors possibly thinking to justify a ratio that is that far out of whack? Hey, maybe it is different this time. Right? Either that or they aren't picturing the impact natural gas powered cars would create should that ratio continue.

Natural Gas Cars: CNG Fuel Almost Free in Some Parts of the Country

While the national average price of gasoline is now $3.60, some residents of Utah are happily filling up on compressed natural gas (CNG) at $0.63 per gallon. That’s the country’s lowest price for CNG, which has understandably caused a surge in demand for vehicles running on a fuel that one man described as “practically free.”

New Hurdles Loom for Commodities ETFs

Investors consider ETFs and ETNs to be effective vehicles for gaining exposure to commodities in their portfolios. But their popularity may be working against them. Commodity ETFs and notes have to buy more underlying commodity futures contracts in order to be able to issue additional shares—and there's growing concern at the Commodity Futures Trading Commission (CFTC) that the deluge of money pouring into these ETFs and ETNs from retail investors may be distorting market prices. So far most of the attention is focused on certain energy and agricultural products, but that's enough to cause prices of ETFs that track broad commodity indexes to veer far from the funds' net asset values, making them less attractive than they were.

The Culprit: Retail Investor Demand

Doesn't that just figure? It reminds me of the gold coin proof advertised on TV. "51mg of pure 24KT gold" is roughly 1/20th of a gram of pure gold. 1 gram is roughly 1/28th of an ounce. 51 mg of pure gold is therefore currently worth roughly $1.78 (1/560th of $995). They say bad money drives out the good. 51 mg of gold for $19.95 sure seems like bad money. Clearly there is a deluge of people buying the coins though. The advertisements do continue.

I'd much rather spend the money on high quality toilet paper that can be easily hoarded for future needs than spend it on an overpriced toilet paper commodity ETF (with annual expenses!) OR a gold coin reproduction. Heck, I'm not even all that convinced gold itself is a bargain these days. Maybe that's just me looking at the gold to toilet paper price ratio. It seems nearly as messed up as the oil to natural gas price ratio in my humble opinion.

Hey, just something to think about. As hard it is to do with stagflation in my name, I'm still bracing for deflation. Something too wickedly fishy smelling this way comes for my liking. Serious inflation seems obvious in the future. Unfortunately, betting on the obvious is often a good way to lose serious money.

That said, I do think natural gas is probably a relative bargain right now. It's fallen from the 2007 "bargain" price of $8.90 all the way down to $1.88. That's like having an 80% off coupon and using it to buy something from the clearance aisle.

In summary...

Oil seems very overpriced relative to natural gas to me.
Gold seems very overpriced relative to toilet paper to me.

I have no great desire to be long oil or gold at these prices, and that does not bode well for my stagflationary name. As a saver simply trying to protect my nest egg, I am NOT complaining.

This is certainly not investment advice. I am long toilet paper though and have no positions (neither long nor short) in oil, natural gas, or gold.