March 25, 2002; Sooner Than Expected Strength in Natural Gas and Oil Futures

Six-year natural gas price advanced 5% to $3.83 from $3.65 in the past week (see Chart).  Six-year oil price advanced 1% to $22.74 from $22.41.  Six-year natural gas moved above six-year oil on a 6:1 heating equivalency basis.


This was supposed to be the time at the end of winter when natural gas crashed down, not up.  The surprise is a sign of strength that investors should not miss.  Though we can no longer buy natural gas the commodity or natural gas producer stocks at the lows of recent weeks we now have favorable momentum.  Some investors are willing to miss a bottom of indeterminate duration or price level in favor of committing when a new up trend is established.  We think the positive direction is evident now.   The trend has already been strong enough that it can absorb moderate setbacks without changing direction. 


If we read a favorable direction for stocks from futures, the question still remains where are futures ultimately headed?  After all, there is not a lot of volume of trading in natural gas for delivery in April 2007, one of our data points, for example.  Because no one knows the future, a diversified portfolio ought to be invested in growth with protection from inflation and deflation.  After two decades of relatively benign inflation, we think most investors should ratchet up their inflation protection for the next decade while also maintaining deflation protection and growth exposure.  Energy investments offer a lot of inflation protection, a little deflation protection in some cases and moderate growth.

March 25, 2002; Meter Reader: Booming Futures