Smells Good: The Case for Natural Gas

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So, comparing apples to apples on a BTU energy basis, the energy ratio would be 5,800,000/1,024,000 = 5.6 oil/gas [BTU]. The conclusion here is that, based purely on energy equivalency, natural gas is a bargain at today's prices. One could therefore make a decent bullish argument that natural gas prices need to rise to keep up with oil on a purely energy equivalent basis.

So much attention is being paid to the high cost of crude oil these days, is natural gas being overlooked from an investment perspective? As we all know, natural gas is the dominant heating fuel in a majority of US homes. Natural gas is a fuel for electrical power generation and an important feedstock for the fertilizer industry. Increasingly it is being used as a transportation fuel...

Certainly hurricanes Katrina and Rita impacted natural gas production, distribution, and prices for the periods shown. That said, the trend is clear: US nat. gas prices are rising and roughly 60,000 more wells were needed in 2006 to produce a slightly lower amount of nat gas as in 2002.

As I write this article, oil is trading at $128/barrel and natural gas is trading at $11.79 per thousand cubic feet, for a price ratio of 10.9 oil/gas. On an energy basis, according to the EIA website:

1 barrel of crude oil (42 gallons) = 5,800,000 BTU

1 cubic foot natural gas = 1,025 BTU

So, comparing apples to apples on a BTU energy basis, the energy ratio would be 5,800,000/1,024,000 = 5.6 oil/gas [BTU]. The conclusion here is that, based purely on energy equivalency, natural gas is a bargain at today's prices. One could therefore make a decent bullish argument that natural gas prices need to rise to keep up with oil on a purely energy equivalent basis...

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