Natural gas prices tumbled again Thursday, hitting a new seven-year low of $2.52 per million cubic feet after the government reported an increase in supplies. Meanwhile, benchmark crude for October delivery advanced to $68.17 a barrel on the Nymex. The ratio of the price of a barrel of oil to a million cubic feet of natural gas is now 28.2 compared to the historical average of 10.0. One can interpret this one of three ways; 1) either natural gas prices are artificially low, or 2) oil prices are artificially high, or 3) the fundamental relationship has changed due to supply and demand factors.
If natural gas prices are artificially low due to speculative activity, then this would present an opportunity for the long term investor to buy natural gas. The United States Natural Gas fund (UNG), an exchange-traded fund that tracks natural gas prices, has plunged this year hitting a 52-week low of $8.94 a share on September 3, well down from $62.00 per share in July 2008. So should investors jump in and buy shares of UNG. I say be cautious. The price of natural gas and UNG could go lower.
Even though the ratio of the price of oil to natural gas is at a 25 year high of 28.2, the ratio of oil production to natural gas production is at a very low level (not a record but low nonetheless). What this is telling us is that, natural gas prices are very low due to significant increases in supply or production. Thus, I would not expect any momentous natural gas price rebounds unless and until there is a rapid upturn in natural gas demand due to changing federal energy policy.