Last Updated : 05 August 2008 at 12:15 IST

Is Natural Gas a good long-term investment?

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By Ziad P S
Investors have been confused at the global markets that have been in turmoil. Particularly, oil and Gold investors are worried looking at the volatility that these two major commodities are undergoing worldwide.

Oil prices have seen the peak levels thanks to the turmoil created by the nuclear programmes of Iran, a member of oil cartel OPEC. The key players in the global markets are not the OPEC and allied companies but countries like the United States and Israel which put the trump cards from time to time in order to influence the market value of oil.

Any way, confused investors are these days moving towards alternative sources energy which they hope they can rely on for long-tern investments. The volatility in gold and oil prices will continue to rule the market unless and until the economic bubbles in the US are resolved.

Several forecasters and experts still keep bullishness over precious metals such as gold and Platinum along with Natural Gas for a while. According to them, natural gas has greater investment potential and future market value than other hot commodities such as Crude Oil or metals.

On a long term perspective, Natural Gas correlates closely with oil, since a BTU of energy at the end of the day is a BTU, and it doesn't matter too much whether it is coming from oil or natural gas or other forms.

From time to time, natural gas deviates substantially from oil in accordance with its availability in the markets. Like right now, if we look a multiple year gas/oil ratio chart that gas/oil is at the bottom of the trading range today.

The current free fall in the natural gas market is more in sympathy with the falling oil. This drop may not go too far below the current $9 level; probably $8 - $8.5 range should provide a good support.

The current drop in natural gas provides a good buying opportunity for investors with a long term horizon, if they believe that the long term trend on the oil market is intact and only under correction, and oil will stay at 3 digits and go back up to higher high in the future.

The historical oil/gas ratio fluctuates between 4-12, with average about 7. Based on this, even if oil is at $100, it wouldn't surprise to see NG go back to $15 next year, with average price above $10 in future years.