Tuesday, June 16, 2009

Oil/Natural Gas Ratio Still Extreme

Looks like the oil/natural gas ratio has begun correcting but is still at an extreme.

The products are not the best of substitutes, but their price movements should be correlated positively instead of negatively as has been the case recently, since they are both derivatives of economic activity.

Seems like oil traders are betting on inflation and gas traders on deflation which is an inconsistency we might be able to take advantage of.

I am looking for a long gas/short oil trade to bet on mean reversion. Suggestions?


Henry Bee said...

hello CP. I'm in the same trade. Best of luck to both of us.

CP said...

How are you playing it?

I would not want to own UNG but shorting an oil ETF adds advantage to the trade.

SS said...

New nat gas discoveries in the U.S. may have changed the equation,


Henry Bee said...

I'm short dollar-neutral USL/UNG pair.

UNG's shortage of shares isn't so much a concern to me.

CP said...

It's not the shortage of shares but the fact the NG market is in contango.

So, whenever the fund rolls over its contracts it has to buy dear and sell cheap. Slowly bleeding off money.

I'm thinking NG royalty trusts might be a better way to do the NG leg of the trade.

Anonymous said...

everyone pays an premium for options or a forward, why is contango all of a sudden so scary?

Henry Bee said...

CP, the contango problem was evident in USO as well. Just compare USO/USL ratio.

However, the market has discounted the contango for USO. Notice how USO has outperformed USL since the march low by ~10%. I suspect the same applies for UNG. Not too big a concern for me.

dre said...

The trade has been advertised on the street a lot lately, I would be worried about that. also the gas is a domestic story versus oil international (weak dollar, Iran, decoupling etc.). I would do the trade in futures as well, due to the ETFs being a broken product for longer term investing.