NATURAL GAS IS NEW ENERGY LEADER -- NATURAL GAS STOCKS ARE PLAYING CATCHUP -- MUTUAL FUNDS OFFER BEST WAY TO DO SOME ENERGY SWITCHING
A COMPARISON OF NAT GAS AND OIL... It's becoming increasingly clear that natural gas is now the strongest part of the oil patch. Part of the reason why can be seen in the following charts. The first two charts compare the ten-year history of crude oil (Chart 1) and natural gas (Chart 2). Both are trading at record highs. [Natural gas hit a record high again today while crude oil is still below its record peak at $70 which is another demonstration of the former's new leadership]. But the path to those record prices hasn't been the same for the two commodities. Chart 1 shows that crude broke through its all-time high at $40 in the middle of 2004. Natural gas accomplished that task in the second half of 2005. That means that the bullish breakout in natural gas is more recent than the one in oil. It also means that natural gas is playing catchup to oil. That can be seen better in Chart 3.
Chart 1
Chart 2
NATURAL GAS IS PLAYING CATCHUP TO OIL ... Chart 3 is a relative strength ratio of natural gas ($NATGAS) divided by crude oil ($WTIC) through yesterday. Two things are immediately evident on the chart. From the start of 2003 through the middle of 2005, crude oil prices did much better than natural gas. It wasn't until August of this year, however, that natural gas prices started to play catchup to oil. During that month, the natural gas/oil ratio broke its two and half year down trendline (see circle) and broke through its late 2004 peak to turn its trend upward. That puts natural gas in the role of the new energy leader. I recently wrote that I thought oil stocks had become over-extended. That being the case, energy stocks with a heavy natural gas exposure may the best place to be in the energy sector.
Chart 3
NATURAL GAS INDEX VERSUS ENERGY SPDR ... The next chart extends the comparison of natural gas and crude oil to their respective stocks. Chart 4 is a ratio of the AMEX Natural Gas Index ($XNG) divided by the AMEX Energy SPDR (XLE). [The XLE includes some natural gas stocks but with a smaller weighting]. The ratio shows that the Natural Gas Index has underperformed the XLE since 2003 (much like the commodity). However, the ratio line appears to be moving higher. That suggests to me that natural gas stocks are starting to exert more leadership in the energy sector. We see the same pattern in energy sector mutual fund charts.
Chart 4
NATURAL GAS FUND STARTS TO OUTPERFORM ... Which leads us to the natural question as to how an investor can take advantage of these intra-sector moves. Unfortunately, there's no Exchange Traded Fund that deals exclusively with natural gas stocks. An investor can of course buy some individual natural gas stocks. The easiest way, however, may be through sector mutual funds. Chart 5 plots a relative strength ratio of the Fidelity Natural Gas Select Fund (FSNGX) divided by the Fidelity Energy Fund (FSENX) through yesterday. The falling ratio line since the start of 2005 shows relative underperformance by the natural gas fund. Since August, however, the ratio line has turned up. One way to take advantage of that subtle shift within the energy sector is to switch some funds out of a general energy fund into a natural gas fund. It's quite possible that other fund families may offer the same option. I'm using the Fidelity funds here simply as an example of the relationship between natural gas stocks and oil-related stocks. [In today's trading, the price of natural gas jumped 9.9% to a new record high, while crude oil climbed 2%. The Natural Gas Index (XNG) was the only one of the energy indexes to hit a new record]. Earlier in the year, I suggested that the best energy value was in oil service. I now believe the best value in energy is natural gas. None of the energy groups are cheap. But natural gas may offer the cheapest option in an expensive sector.
Chart 5
