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Natural Gas vs Oil

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September 03, 2009 – Comments (19) | RELATED TICKERS: UNG

Alright.....

So right now were sitting at  around $70/barrel oil and $2.50/1000cf of NG......

Lets compare apples with apples.... 

1 barrel of oil = 5.8m btus

1,000cf = 1m btus

Multiply $2.5 by 5.8m btus = $14.5/ 5.8m btus for NG

Meaning... it will cost you $14.50 to get the same amount of energy a $70 barrel of oil will provide.  The spread has now hit a multiple of 5 times.

This is not sustainable.... To put this in perspective, the spread wasnt even at 2 when oil was at $143/barrel.

Either oil has to come down.... or NG has to go up.  I predict a little of both.

 Feel free to provide your thoughts....

19 Comments – Post Your Own

#1) On September 03, 2009 at 3:20 PM, SkepticalOx (99.45) wrote:

Two things to take into account: With new drilling tech, it's now easier than ever to get natural gas. And we have a lot of it. Demand is also down due to recession.

Beware of historical ratios... people were making the same call when NG was twice the price...

With that said, it may just spike this winter, and apparently a certain hedge fund placed a huge bet by buying the right to buy NG at $10 in Jan 10 and Feb 10 (Bloomberg).

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#2) On September 03, 2009 at 3:25 PM, outoffocus (22.89) wrote:

So should I pick up some UNG?  I keep hearing that there are problems with that security.

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#3) On September 03, 2009 at 3:26 PM, portefeuille (99.60) wrote:

1,000cf = 1m btus

The conversion factor depends of course on the composition of the natural gas. 

-------------------------

One thousand cubic feet of gas (Mcf) -> 1.027 million BTU = 1.083 billion J = 301 kWh

(from here)

1 cubic foot of natural gas = 1,015 BTU*

* The national average is 1,000 BTU/ft^3. FNG gas has 1,015 BTU/ft^3 because of processes unique to FNG.

(from here)

1,000 cubic feet (1 Mcf) = 1,027,000 Btu (1 MMBtu)

(from here

 

 

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#4) On September 03, 2009 at 4:12 PM, MustKeepFocus (< 20) wrote:

I've been thinking about what you wrote for a while now, and I'm pretty sure NG will be (a lot) higher than this in a year or 2.

What do you think is the best way to go allin with my saving on natural gas? UNG ?

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#5) On September 03, 2009 at 4:17 PM, ElCid16 (94.01) wrote:

So Port, the "take-home point" with all your number crunching is that the spread has a current multiple of roughly 4.9 instead of 4.8?

Maybe I'm missing something...

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#6) On September 03, 2009 at 4:26 PM, motleyanimal (89.79) wrote:

For all the talk of the relationship between oil and natural gas, I have always traded them as seasonal opposites. I think you can only buy producers who have adequate hedges in place, WLL, WHX, LINE as examples. Drilling and exploration will be under great stress, as will Canadian royalty trusts. The smaller players could go under, merge, or be bought up cheaply.

I don't like either NG or oil right now, but I am holding WHX.

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#7) On September 03, 2009 at 4:38 PM, NoMoeMoney (< 20) wrote:

No way natural gas will stay low !!! ...yes I know inventory and production is reaching super oversupply. However, NG is ENERGY and we all know how thats played. Lets see, should I heat with gas or oil this winter? hmmmm.

UNG is a firecracker right now, hold it with your hand closed and it will get blown off, hold it with your hand open and maybe just get burned...???

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#8) On September 03, 2009 at 4:51 PM, SkepticalOx (99.45) wrote:

UNG (and other nat gas ETFs) have technical issues that cause them to underperform natural gas whether nat gas is going up or down... Stick with the nat gas producers for your bets (such as DVN).

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#9) On September 03, 2009 at 5:07 PM, ozzfan1317 (81.13) wrote:

Oil supplies are starting to run out hence all the new technologies In twenty years who knows how we will fuel our vechiles however there is an ever abundant supply of NG which one do you think is more likely to spike?

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#10) On September 03, 2009 at 5:10 PM, MustKeepFocus (< 20) wrote:

Thanks and please check my blog if you'd like to share some more tips with me on NG. This is quite important for my future.

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#11) On September 03, 2009 at 7:26 PM, portefeuille (99.60) wrote:

So Port, the "take-home point" with all your number crunching is that the spread has a current multiple of roughly 4.9 instead of 4.8?

No, you might get a factor of 5.8/1.027 = ca. 5.65. But then again the 5.8 would also depend on the composition of the oil and I am not sure what price would be best to use (corresponding futures? spot?). Not all that easy. I do think that buying producers might be a good idea especially the ones that have a low "enterprise value"/"proven natural gas reserves" ratio. The ratio of the prices of oil and natural gas should be lower in 10 years due to increased use of natural gas (relative to the use of oil) and a better ability to substitute one by the other with the increased use of LNG.

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#12) On September 03, 2009 at 7:38 PM, portefeuille (99.60) wrote:

(I guess you can use both "proved reserves" and "proven reserves".)

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#13) On September 03, 2009 at 9:28 PM, Bays (30.26) wrote:

I do not own UNG, nor have I read the prospectus.

I know supply is extremely high right now, but my point is that with NG being so cheap right now compared with oil on an energy basis, it is only a matter of time before the demand for NG picks up fast. 

Not to mention that NG is a cleaner, more efficient, LOCAL, and more abundant resource.  

With the price of NG nearing the cost to produce it, production will eventually slow down and bring supply back down to reasonable levels. 

 

The ratio of the prices of oil and natural gas should be lower in 10 years due to increased use of natural gas (relative to the use of oil) and a better ability to substitute one by the other with the increased use of LNG.

The increased use could come from vehicles? T Boone Pickens seems to think so....  It would make sense.

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#14) On September 03, 2009 at 9:40 PM, RLAprof (21.35) wrote:

If you are wondering about UNG, don't touch it:

https://news.fidelity.com/news/news.jhtml?articleid=200908141414STREETCMREALTIME_10576644&IMG=N&cat=default 

 

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#15) On September 04, 2009 at 12:03 PM, GNUBEE (29.12) wrote:

motleyanimal,

what do you think the shelf life is on canroys? - 2011 forward.

That's something to take into account too.

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#16) On September 09, 2009 at 11:10 AM, Bays (30.26) wrote:

Nice little rebound in NG since this post.

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#17) On September 09, 2009 at 6:47 PM, skeptic86 (95.55) wrote:

Before you invest in energy, you might want to read this.

http://www.sec.gov/news/press/2008/2008-122.htm

"Permitting use of new technologies to determine proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserves volumes.

Enabling companies to additionally disclose their probable and possible reserves to investors. Current rules limit disclosure to only proved reserves."

this is going to cause an sizable influx reserves. so its going to make NG companies look good by adding reserves, but it'll also show a lot of supply. im not sure what that will do for stocks.

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#18) On September 20, 2009 at 10:13 PM, LuckyStrike88 (< 20) wrote:

Other than UNG and other ETF's what are some good plays on NG?I bought into WHX at 10.30 and it is up over 40% so far not counting 30% dividend but I want something else to diversify (companies not commodies)

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#19) On October 05, 2009 at 8:19 PM, Bays (30.26) wrote:

I should have put my money where my mouth is..... When I wrote this blog, I started a relatively small position in HNU.TO, a leveraged NG ETF, and watched it run up nearly 75% now. 

While I am always happy to make money, I could have made a hell of a lot more if I wouldnt have been so cautious. 

 

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