Many investors wonder whether or not there are advantages to being long or short one commodity versus another or if all commodities will roughly trade in the same manner. Like many of the other questions I tackle here on the website, there is no exact answer (as is the case with many questions dealing with the financial markets) to these questions. Even though there is no precise mathematical science to answer this question, there are many identifiable factors involved that can shed light on what to many seems to be a difficult and never-ending puzzle.
Two commodities which many inexperienced investors assume are very similar are crude oil and natural gas. In many cases, the difference between the use of and investments in these two commodities could not be more different. Crude oil is one of the base commodities that all investors follow, while natural gas is mistakenly tagged into conversations concerning crude oil because it also happens to be an energy commodity. The key to figuring out which can benefit your portfolio depends on your current allocation and macro-economic outlook.
Uses and Infrastructure Outlook
Crude oil currently is one of the most used commodities in the world, as almost every single nation around the world has a varying degree of crude oil “addiction.” Crude is used for everything from transportation to industrial processing to commercial products. Many consumers would be surprised to find out that petroleum based products include things as far reaching as women’s make-up. On top of this, the world’s economies have built both their discretionary and staple economic functions around crude oil infrastructure. Until this decade, excluding a few spikes in the 1970s and 1980s, this has not been a problem because oil was freely available. Most current estimates have crude oil contributing to over 40% of world energy consumption. However, there are no reliable numbers for world consumption.
Natural gas on the other hand is used more often for home heating, industrial production, and a few other commercial uses. It is also heavily used for electrical generation by utility companies. This gives natural gas a larger seasonality component, which I will get into later. Natural gas currently has less of an infrastructure built up in the United States, but aggressive capital expenditure programs by companies such as ConocoPhillips (COP: 54.85, 0.00 (0.00%)), BP plc (BP: 48.45, 0.00 (0.00%)), Chesapeake Energy Corp. (CHK: 17.27, 0.00 (0.00%)) amongst many others are quickly changing that.
Advantage: Crude oil, for now. A return of high gasoline prices or new left-leaning legislation could change this going into the future.
Geographic Supply and Demand Functions and Seasonality
Both crude oil and natural gas have their own separate seasonality, and for more background on both of these commodities you can read The Fundamentals of Crude Oil Pricing and The Bullish Case for Natural Gas. Crude oil traditionally has had higher demand during the warmer months when driving is much more prevalent.
