Over the last year and a half, the Oil/Natural Gas ratio has averaged about 11. Which means a barrel of oil was worth the same as 11 Mcf of natural gas. But when the markets started going haywire, so did the relationship between oil and natural gas.
Last summer when oil spiked to $147 a barrel, natural gas didn’t go along for the ride. The ratio soared to 16. When oil prices collapsed, natural gas prices fell. But they didn’t fall as fast as oil prices. As a result, the ratio fell to a rock bottom level of 6.
Now, with oil prices coming off a sizable run, natural gas prices near multi-year lows and showing no signs of a significant recovery anytime soon, the Oil/Natural Gas ratio has reached another extreme.
As I write, the ratio sits at 16.8 (West Texas Intermediate:$69.16/NYMEX Natural Gas Future:$4.10), well above its long-run average of 11.
The simplest way to play it would be to short U.S. Oil Fund ETF (NYSE:USO) and buy U.S. Natural Gas Fund (NYSE:UNG) in relatively appropriate amounts. These funds track oil and natural gas prices, respectively. And although there are some differences due to their structure, contango, and other factors, you’ll be in position to ride them back to normal.
You’ll profit as the ratio makes its way back to 11. So whether oil falls, natural gas rises, or some combination thereof, you’ll be positioned to benefit. As the ratio works its way back to normal, you’ll be sitting on gains of about 35% after all is said and done.
Time is on Your Side
Although this strategy may be a bit more advanced, it’s something worth getting comfortable with. After all, it’s going to be a tough time to be an investor over the next few months. The spectacular rally has ended. The days of watching stocks climb 5% to 10% each week are over. And the volatile swings will only add stress to an already stressful situation.
But either way the market goes from here, I’m confident this is no time to get down on the markets or investing. It is the right time to get prepared for the next few years. It’s a time to learn new strategies. It’s time to develop a plan to make it through the tumultuous years ahead.
Because if you get prepared now, you will be in a comfortable position regardless of what direction the economy goes. It’s probably that new regulations and taxes will change the way people live, and by having a few more strategies in your investing tool box, you’ll be allowed to take what the market gives you whichever way it heads from here. And that’ll be well worth the effort.
Good investing,
(Andrew Mickey is Chief Investment Strategist, Q1 Publishing)
