Six reasons why natural gas is better investment than oil
- Reserves deplete faster than oil (in general)
- Oil/natural gas ratio: the price of oil divided by the price of natural gas is at an all-time high (or close). This ratio stands at 17 (historically it has been at about an 8 or so), Natural gas prices will go up, oil will decline, or both. Also, natural gas is not a good hedge against the declining dollar (it is for the most part a domestic commodity) and storage capacity is more limited, thus not as admired by speculators as oil. This explains in part why it lagged the the spectacular performance of oil of late.
- At $4, natural gas it is uneconomical to develop and look for new reserves.
- No OPEC competition, LNG (liquid natural gas) imports are uneconomical at these prices.
- Politically more favorable than coal.
- After emission caps are implemented natural gas will become a cheaper alternative than politically and environmentally unfriendly coal.
I’m not sure I agree with #4.
Certainly, new LNG gas projects are way uneconomic at $4.Yet, if you are a West African nation with a brand new LNG facility, you probably don’t care about ROI as much as generating cash. Your new export plant just came online and you are sitting on NG without a significant domestic market. Assuming you could liquefy and ship for $2-3/mcf, you will sell it the U.S. for $4. In the past, these exporters would have passed up the U.S. market for better prices in Europe, but with new LNG supply on-line, there is more LNG available than can be put into Europe so it will come to the U.S.
The above notwithstanding, I am very bullish for NG long-term for the reasons you’ve stated.
but it is local therefore it depends on recovery of the US while oil in the most depend on recovery of the world. most the growth in oil consumption in the last few years were from non developed countries.
and the ratio oil oil/gas is a stretch. It is an average which is very distorted and the variance around it very wide. also give me one reason why historical ratio like this one should hold into the future
I am not bullish on Oil or Gas but comparisons like these do not hold. Very different supply and demand factors.
In terms of comparing nat gas versus oil, first, the drivers of the two are a bit different — we have a surplus of nat gas in the US due to unconventional reserves, albeit these are uneconomical below a price of $5-$6 (but can be started up quickly). It is hard to argue for a deficit in the US over the next few years.
In terms of oil, the pricing is very solid as one can argue for a deficit, although not in any way related to “peak oil” — through 2012 due to new environmental restrictions on ultra low sulfur fuel used for shipping (which accounts for approx 7-8% of world oil usage). One should understand that there are two types of oil — high sulfur (sour) and low sulfur (sweet) and these are two different markets. A deficit can easily occur in sweet by 2012 due to new low sulfur restrictions. Oil trades on the price of sweet the production of which is only 15 million barrels per day while sour is OPEC dominated, so once the price of sweet goes up, then OPEC can raise the price of sour lockstep. Refineries make no money currently so cannot invest in hydrotreating facilities (used to remove sulfur from crude).