The equally weighted CRB continuous commodity index (CCI) is flirting with all-time highs as the Federal Reserve is running the printing presses in overtime, yet there are some commodities that are flirting with multiyear lows. The beauty of the CCI index of 17 different commodities is that every constituent has 5.88% weight, and even the different groups are capped as they tend to move together, i.e. there are only three energy commodities–oil, natural gas and heating oil–capped at 17.64% (3×5.88%). But the developers of the CCI surely would have been surprised to see that for a while, natural gas and oil have been moving in opposite directions.

It used to be that a crude oil/natural gas ratio of 7 was considered normal. This is because the British Thermal Units (BTUs)–a popular measure of the amount of energy contained in barrels of oil equivalent (BOE)–were equal for natural gas and oil at that ratio level. Currently we are three times higher than the historical norm with an oil/nat gas ratio of 21, and we have been elevated for almost two years. What gives?

Natural gas is a strange commodity as it is difficult to store, and if you produce more of it, the price can fall precipitously, yet demand does not respond as much with a huge drop-off in prices. There are places in the world that are in dire need of more natural gas, but how do you build a pipeline that crosses the ocean? Pipelines are hugely expensive and very political when they have to cross many borders.

One option has been to liquefy natural gas by cooling it and turn it into LNG (liquefied natural gas). This allows for natural gas to be shipped via a tanker, instead of a pipeline. The issue here is that the tankers are very expensive, and you cannot plug LNG directly into a natural gas distribution system. LNG needs to be de-liquefied first at a special LNG terminal where the LNG tankers are docked, which is also a costly process.

So a combination of milder weather, a weakish economy and increased supply of natural gas over the past three years have produced a record low valuation of the clean fuel when compared to other energy commodities.

A Structural Shift in Natural Gas

The increased supply of natural gas is permanent fixture of the investing landscape. This year the Energy Information Administration (EIA) more than doubled the estimate of U.S. technically recoverable reserves of natural gas from shale to 827 trillion cubic feet from 347 trillion cubic feet. Shale is a sedimentary rock that was not widely used as a source of the natural gas before. New drilling methods allow natural-gas producers to drill horizontally with injections of water, sand and chemicals, which permanently increase the availability of the clean fuel.

This is a nice problem to have for natural gas consumers with oil pushing $90, and not so nice for natural gas producers. As investors, we have to look for ways to capitalize on this trend, or be alert to stay away from investments that will do poorly because of this shift in the natural gas market.

The first commodity ETF to implode is likely to be the United States Natural Gas Fund (NYSE: UNG), which was down 4.85% on Thursday as estimates of milder weather in late December suggest that heating demand will fall as supply is rising. The UNG ETF has the same problem as the United States Oil Fund (NYSE: USO), where the rollover of front-month futures into the next month guarantees embedded losses for long-term holders.

Since topping out in 2008, front-month natural gas futures are down 68.4% while the UNG ETF is down 90.8% because of this rollover issue. UNG can always reverse-split like some of the leveraged ETFs have done, but this is not a buy-and-hold vehicle. Like the leveraged ETFs, UNG can serve a valid purpose for short-term trading only.

If you want to invest in natural gas, consider the publicly traded arm of the Russian government–Gazprom (PINK: OGZPY). This is because the company has been used as a political tool as it holds Europe in its grip. Still, Gazpom has the number-one position of undeveloped reserves of hydrocarbons of any publicly traded company in the world. With a market capitalization of $149 billion, Gazprom is a way to capitalize on the resurgence of Russia and long-term viability of natural gas as an energy source. Investing in Gazprom is no different than investing in CNOOC (NYSE: CEO), which, too, is controlled by the Chinese government.

In the U.S. market, ConocoPhillips (NYSE: COP) offers a nice balance between natural gas and oil. You get to participate in any upside in crude oil prices while also benefiting from an eventual comeback of natural gas, whose depressed price will sooner or later cause a comeback in demand, be it in the form of natural gas-fired electricity plants or other uses.