(Bloomberg) -- U.S. natural gas is the cheapest it's been relative to oil since the 1991 Gulf War, raising the prospect of a windfall for investors who sell crude and buy the other heating fuel.
Gas prices will probably rise because inventories are at a four-year low and below-normal temperatures are stoking demand, said Brian Hicks, who helps manage $1.5 billion at U.S. Global Investors in San Antonio. At the same time, he said, an increased supply of oil and a slowing U.S. economy will drag crude prices lower.
A barrel of crude has cost at least 11 times as much as 1 million British thermal units of gas for three months, compared with an average of 7.8 times in the past 10 years and 18 times in July 1991, when the Gulf War threatened oil supplies from Kuwait and Iraq. The spread, a function of oil's 54 percent surge in the past year, was as high as 13.6 times before oil peaked at $100.09 a barrel on Jan. 3. Gas has climbed just 5 percent in the year.
``In the world of hydrocarbons, natural gas is a bargain compared to crude,'' said Peter Beutel, the president of energy consulting firm Cameron Hanover Inc. in New Canaan, Connecticut. He correctly predicted oil would reach $98 a barrel last year.
Futures contracts on the New York Mercantile Exchange indicate traders are betting this year will be the first since 1993 that gas prices advance while oil declines. Consumers would pay higher household gas and electricity bills, and costs for companies such as Dow Chemical Co., the biggest U.S. chemicals maker, would climb. Profit at gas producers ConocoPhillips, biggest in the U.S., XTO Energy Inc. and EOG Resources Inc. will advance this year, according to analysts surveyed by Bloomberg.
Gas Seen Rising
Gas may increase to $9 or $10 per million British thermal units by May or June, up from $8.30 on Feb. 8, according to Neal McAtee, who was named to the All-Star Analysts Hall of Fame in 1998 by the Wall Street Journal. Oil, which ended last week at $91.77 a barrel, may go to $70 or $72, he said.
U.S. natural gas for March delivery rose as much as 15.3 cents, or 1.8 percent, to $8.454 per million Btu in electronic trading on the New York Mercantile exchange at 10:47 a.m. London time. Crude oil for March delivery traded at $91.66 a barrel, down 11 cents.
A trader who sells $10 million of Nymex oil and buys an equal amount of gas right now would come out about $4 million ahead, or 20 percent, should gas reach $10 and oil $70.
``Natural gas looks to be setting up for a bullish run going into the summer,'' said McAtee, who helps manage $18 million at Red Rock Asset Management in Memphis, Tennessee.
In the past decade, oil sold for more than 12 times natural gas in three stints prior to the latest one. Each time the gap narrowed to the average within four months.
XTO's Simpson
XTO Chief Executive Officer Bob Simpson is predicting something similar this time. Oil will sell for as little as 10 times gas next year and 8 times within five years, he said.
``There's a perceived oversupply of natural gas that's transitory and illusory,'' Simpson, 59, said in a telephone interview from the company's headquarters in Fort Worth, Texas. ``There's going to be a correcting event.''
The last such event was in August 2005, when Hurricane Katrina shut down every gas well and pipeline off the U.S. Gulf Coast. Gas prices peaked in December 2005 at $15.78.
XTO's profit will rise by 4 percent this year to $1.76 billion, according to analyst estimates compiled by Bloomberg. EOG, the Houston-based gas producer born out of Enron Corp., will post a 27 percent increase to $1.38 billion, the data show.
Hurricane Season Flopped
Natural gas represents 24 percent of U.S. energy supply, about as much as coal, according to statistics compiled by BP Plc. Oil contributes about 40 percent, and much of the rest comes from nuclear reactors and hydropower plants.
One reason not to buy gas is the unpredictable nature of weather. Amaranth Advisors LLC lost $6.6 billion on the expectation gas prices were poised to rebound in 2006, leading to the biggest hedge-fund collapse on record. When forecasts for a strong hurricane season proved incorrect, producers were able to keep output flowing from the Gulf of Mexico, the biggest domestic source of gas in the U.S.
Commercial traders such as power-plant owners had a record- large holding in natural gas at a net 81,263 contracts on Jan. 7, according to U.S. Commodity Futures Trading Commission data. As of Jan. 29, commercial traders held 24 percent more short positions than long positions on oil futures, meaning most were betting on declines in prices, and 15 percent more long positions than short positions on gas.
U.S. gas inventories fell 12 percent to 2.06 trillion cubic feet in the past 12 months, reaching the lowest for this time of year since 2004, according to Energy Department data.
