The ratio of oil to natural gas prices has been steadily increasing despite positive economic data and speculation about potential inflation and pricing pressure on energy. The largest natural gas exchange traded fund (ETF) has been reflecting this odd pattern by losing more than 50% during the past year.
Since 1995, the ratio of oil to natural gas prices has been in the range of five to 15. Recently, however, the ratio has soared above twenty-five, reports Kurt Brouwer of MarketWatch. This means that the price of oil is getting more expensive in relation to the price of natural gas. [Contango: What It Is.]
Looking at the performance of United States Oil Fund, LP (NYSE: USO) versus United States Natural Gas Fund, LP Unit (NYSE: UNG), you can see a similar tendency.
However, in what may bode well for UNG, natural gas futures advanced on speculation that an economic recovery would bolster the fuel demands of industrials and power plants, explains Reg Curren of BusinessWeek. Legislation from the White House may also help increase demand for natural gas. [Obama’s Proposal: A Win for Natural Gas ETFs?]
Further, natural gas prices have and will continue to impact the number of natural gas rigs operating in the United States, which will in turn modulate supply. Because of recent low prices, the rig count contracted to a seven-year low this past July. Consensus estimates that the economy will expand 3% for the next two years is a good sign that demand may push natural gas prices up once more. [Top 10 ETFs Investors Are Trading.]
For more information on natural gas, visit our natural gas category.
Sumin Kim contributed to this article.