Natural Gas Trade Challenged by Commodity Focus Shift

In recent weeks, Wall Street has been shifting its energy focus from crude oil to natural gas as the price of the latter has become historically cheap. The first signs of global economic recovery spurred investors to jump on the energy and materials stocks. The logic was that any increase in economic activity would require an increase in demand for industrial-related commodities and energy and their prices would rise. As we showed in our last Musings issue, industrialized commodities have been leading the recent rally in prices. The greatest price laggard of the 14 commodities we follow was natural gas, which through the end of May was down 44.3%.

The heat content ratio (British thermal units) between a barrel of crude oil and a thousand cubic feet (Mcf) of natural gas is 5.6-to-1. For ease of analysis, most energy pros and investors use a 6-to-1 ratio to translate volumes of oil or gas into the comparable fuel for purposes of estimating reserve values. This heat content ratio has seldom been achieved price wise in the marketplace as many factors interrupt the straight heat value proposition. For example, natural gas must move through a pipeline from its production source to where it is burned. The lack of adequate pipeline capacity or the absence pipelines to consuming areas can limit market opportunities for natural gas and depress the relative price comparison.

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