Is that gas I smell?

Not of the human orgin, but rather Natural Gas.  Natural gas is a very cheap commodity compared to many out there right now.  Let's take a look at some of the stats, and some charts of course.

First off, based on an energy equivalent basis, crude oil and natural gas prices should have a 6 to 1 ratio. So, what's the current ratio?  If you had 23.55 units of natural gas, then you could  buy one barrel of oil.  Here's a link to the chart:

http://stockcharts.com/h-sc/ui

You can see that after the credit crisis of 2008 oil came on big time, and got to a ratio of 28:1.  It subsequently corrected, and got back to around 14:1 in Sept of 2009.  I'd like to see it come back to 14 again, and if it does could be very profitable.  If oil remains around $105 a  barrel, that's natural gas at $7.50. That would be a nice gain from here when NatGas is trading at $4.48 currently.

The proxy for NatGas is UNG.  It's not a great proxy for NatGas, but it is an ETF that you can use to bet on the rising price of NatGas.  If we reach the level we were at at the beginning of 2010, we would get back to UNG at around 20-22.  Currently, we are at 11.80.  See chart below.

Now why would NatGas increase?  Well, if you need energy, you may consider switching to NatGas as is is a lot cheaper in terms of energy output.  As the energy ratio is 6:1, you can get more for your energy money by using NatGas than oil at this point.  How about monetary inflation?  Here's a nice chart to show you what's going on with the monetary base.  Apparently, Ben hit the "create" button pretty hard at the beginning of the year, and the button is stuck in the on position.  After the money creation (explosion in this case) comes inflationary effects in prices.  It's showed up in many commodities already, but has yet to manifest itself in the NatGas market.

What might cause NatGas to take off?  How about a large country that plans to increase it's usage of natural gas in the next five years?  China, maybe?

http://www.bloomberg.com/chart/iG.YJK3Tb3ik/

Although NatGas is usually a domestic product, it can be converted to Liquid Natural Gas, and shipped out to countries that need it.  How about we actually sell something to China for a change.  Maybe we can export some of our excess NatGas and bring down our account balance with China.  I know they would like that.  They definitely don't want anymore dollars, that's for sure.

Best way to play this trend is with UNG LEAPS.  I'd recommend taking a look at the Jan 2013 calls.  Focus on the calls that are in the money.  If you want to be more conservative, buy deeper in the money calls like the 6's or 7's.  If you want a larger reward if UNG takes off buy close to the money calls like the 10's or 11's. 

Full Disclosure:  I own UNG 2013 calls stirke price of 10.

Until the next time...

Fiat Doubter