Natural gas on the other hand has traditionally higher demand during the cooler months as home heating takes up a larger portion of energy consumption. Besides the difference in seasons, the other fact that separates crude and natural gas is that during the cooler months crude oil consumption does not decrease as rapidly as natural gas consumption does during the warmer months. This fact is very well known and priced into the futures through the backwardation and contango that we see so often in the NYMEX prices. Crude oil has less volatile supply and demand functions when compared to natural gas, and in turn the price movements of crude oil are generally less volatile than natural gas, which isn’t saying much, as crude oil is still very volatile.
Another important point to note is the geographic factors that affect crude oil and natural gas. Natural gas is traded in a number of different markets at different prices around the world. This is because it is impossible to move natural gas over seas without LNG tankers (Liquid Natural Gas tankers). Currently there are less than 200 full-size LNG tankers in the world, and the cost of building these LNG tankers is generally over $300 million per tanker. This transportation predicament can create wide disparagement in the price of natural gas across different continents.
Crude oil on the other hand, depending on the type, is traded at the same price all over the world. A large transportation infrastructure has been built around crude oil and it is very cheap and easy to move. Based on these factors, it is much more relevant to look at regional supply and demand for natural gas and global supply and demand for crude oil.
Advantage: Crude oil for inexperienced investors, natural gas for skilled and veteran investors.
Environmental and Political Outlook
Natural gas seems to be in favor with many powerful financial and political figures as of late. This is due to two main reasons:
- Natural gas on average produces only 60% of the “pollution” that crude oil does when it is consumed.
- There is an abundance of domestic natural gas available for exploration and production that will allow America to rely more on its own natural resources as opposed to the natural resources of other countries, specifically those that do not have aligned interests with the United States.
These two factors have convinced people including legendary oil man T. Boone Pickens, President-Elect Barack Obama, and even the automotive industry executives to push for natural gas as a way of the future. With probable legislation for increased carbon caps and environmental control, it seems that in many cases natural gas will be the logical substitution for crude oil as it is the only other commodity that can be produced on a wide enough scale to satisfy a large shift in demand. Many investors wonder about wind and solar, but the efficiencies of these processes will take 5-15 more years in order to compete with that of crude and natural gas. On top of that, it is easier to drill a well for oil or natural gas than it is to make a wind turbine or solar farm given the world’s current economic condition. Spare drilling rigs are fairly abundant in this economic downturn, but there are no such things as spare turbines or solar panels. There is no disputing that both wind and solar are environmentally superior to natural gas, but these two technologies are solutions to a future problem, not the current problem.
Advantage: Natural gas by a wide margin.
Relative Value
One of the most important aspects when analyzing crude oil and natural gas is the relative value of each commodity.
