If You Don’t Like Natural Gas Try Nat Gas Stocks!

Do equity markets lead commodity markets? Or perhaps more precisely do commodity equities lead the underlying commodities themselves? Our research suggests that there is enough evidence that commodity equities do lead the behaviour of commodities, although the lead times can vary from anything from a month to up to 6 months. Towards the end of last year and at the start of this year we noticed that oil and gas services stocks (tracked by the ETF OIH) bottomed even in the face of an oil price that continued to plummet. This suggested to us that the downside in crude was very limited and that one should be looking at buying into the falling crude price. We now find a similar situation arising with natural gas and natural gas stocks. Oil and Gas pipeline stocks such as Enbridge (ENB), Williams Co (WMB), Spectra Energy, and Kinder Morgan(KMP), to name a few, now appear to have formed solid bases and more importantly they remain virtually unchanged to higher this year even when natural gas itself has fallen by some 40%. From a fundamental perspective their valuations do not appear to be demanding by any stretch of the imagination. So there are two ways of playing “natural gas”. One can buy the underlying commodity itself (either via futures or the ETF UNG) or one can play the next best thing – natural gas stocks. We prefer to play natural gas itself for reasons discussed in previous posts. However, if one was somewhat bearish on natural gas itself why not consider pipeline stocks or other natural gas plays (like Chesapeake, Nicor, or Sempra)? Of course there is another option and that is oil and gas drillers/services themselves (OIH). Which option will prove to be the most profitable? Of course only time will tell!

We are holders of OIH, UNG and a number of gas stocks in our global macro portfolio (Earnslaw). We discuss the individual counters and weightings with our subscribers.