Why Natural Gas Is Lagging And Why It May Soon Outperform Oil

The price of crude oil has doubled from the bottom ($35.13) reached back in December. Coal, as measured by the coal ETF (KOL), bottomed earlier in November, at $9.43; since then it has almost tripled. The last of widely used energy resources that come from under the ground, natural gas, on the other hand, ended down today at $3.73, not very much off its April low ($3.25).

What gives?

This nice chart comes from Energy Information Administration, which provides energy-related statistics for the US government.

Natural gas is the second largest energy source consumed in the US. Petroleum is the first, and coal the third. However, unlike petroleum whose main usage is for transportation (70%) or coal whose main usage is for electric power generation (91%), use of natural gas is equally divided between industrial, residential/commercial, and electric power generation. Within residential/commercial, commercial makes up over 40%. Nearly 50% of natural gas consumption comes from industrial and commercial.

Conclusion: natural gas price has been hit hard by the recession we're in.

The price of oil is almost always cited as a barometer of some sort for whether or not the US and global economy is improving. However, the industrial use of petroleum only makes up 25% of total usage. It seems to me that natural gas is a better indicator of the health of the productive part of economy, and that indicator seems to be saying we have some way to go till we see a recovery.

The bottom for natural gas may be in, though, if you look at the chart of natural gas futures (I posted it on my other blog ). If and when the economy recovers, I think we may have natural gas shortage.

Here's an article from Bloomberg (6/8/09)
Natural Gas Cheapest to Oil Since 1992 Signals Gain: [emphasis is mine]

"Natural gas lost 73 percent in 11 months as the U.S. fell into the deepest recession in 50 years and drillers failed to idle rigs fast enough to control inventories. Stockpiles are 22 percent larger than the five-year average, the Energy Department said. Oil costs 18 times more than gas, the biggest gap since 1992, when the collapse of communism cut supplies from Russia, according to data compiled by Bloomberg.

"Now, gas drillers are tightening their grip on production just as the economy shows signs of improving. The number of U.S. rigs plunged 56 percent in nine months, the steepest drop in two decades, Baker Hughes Inc. said. Gas may rise 38 percent in the second half, while oil will gain 22 percent, according to Bloomberg analyst surveys."

A little caution: the recovery may turn out to be L-shape (i.e. flat-lining, no recovery)...

(11:33PM PST: Oh never mind.. I just read Ambrose Evans-Pritchard's article on Telegraph "The depression quietly deepens" - you can read it too by following the feed link on the left column segment of this blog "Telegraph Ambrose Evans-Pritchard". Now I'm thoroughly depressed.)

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