Today, natural gas is trading at all-time lows on a BTU basis compared with its closest competitors, oil and coal. A BTU (British Thermal Unit) is a unit of energy measurement, which can be used to directly compare the prices of different fuels.
On my chart of the relationship between WTI Crude and Henry Hub natural gas spot prices below, you can see that for the price of each BTU of oil bought today, you could buy nearly four BTUs of natural gas. The only time the ratio has been as high was in the 1979 Iranian oil crisis.
Lest you believe that the extreme ratio is only a product of recent Middle Eastern political turmoil spiking the price of oil, take a look at the chart showing the same BTU relationship between natural gas and coal.
What’s important here is the trend. You can buy 90% of a BTU of natural gas for every BTU of coal. But coal needs to be much cheaper than natural gas to be competitive. And the costs of transporting coal and removing its pollutants are much higher.
Natural gas should trade at a premium to coal, as you can see it did through most of the decade. Gas is easily transported via pipelines and burns cleaner than coal or oil.
The rules of arbitrage say these BTU ratios must come down. A BTU is a BTU. Given room for premiums or discounts for transportation, storage costs and pollution effects, one BTU shouldn’t be worth any more or less than another in the long term. And given the demand for energy products in rapacious developing markets, the outlook for natural gas is good. And this is why investors would be well-served to consider purchasing a nat gas ETF like FCG.