Betting On Natural Gas? Bet On Coal Instead
Michael A. Gayed | Apr 24, 2012 12:52AM ET
– Jim Jones
With natural gas prices at incredibly low levels as a direct result of the shale gas extraction boom coupled with a mild winter across the U.S., I’ve been hearing a lot of traders getting more and more bullish as cheap natural gas gets used more in power generation. It turns out that falling natural gas prices have had a huge impact on the relative performance of coal companies. Coal in the U.S. is primarily used for power generation, but as natural gas has gotten cheaper, more and more power generators have switched from using it because it is relatively more expensive.
Coal companies on average topped out relative to the broader market in early 2011, and began a broad period of weakness in late July, underperforming in an unrelenting way. The price ratio decline has erased nearly all of the alpha generated in coal companies since June of 2009. However, the longer something underperforms for, the more likely it is to outperform.
Notice that there does appear to be some improvement in the ratio, forming what appears to be a bottom. What would solidify this? Rising natural gas prices, which in turn would make coal more competitive once again for power generation.
Instead of betting directly on natural gas then, playing coal might be another way to bet that a bottom may be in place.
Disclosure: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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