December 3, 2009

What is wrong with this picture?

Natural gas producers have rallied and continue to do so although the underlying commodity is suffering. Natural gas producers represented by index for natural gas producers have returned some 45% on YTD basis while the underlying commodity has declined by 62% on YTD basis.

Normally that relationship have a high correlation. Natural gas producers price returns go the way of the commodity. However the relationship seem to have been broken since March of this year.

Is buying in this market indiscriminate? May be, but this is a question that can not be answered with full certainty. You can only attempt to guess as one would never have complete information to ascertain the validity of a claim.


GroovyGeek said...

If this indeed a relationship that has held through thick and thin over a few cycles in the past, there may be money to be made in abitraging the split. Buy gas futures and short the producers, just make sure you have enough capital to survive continued divergence. Not my cup of tea, but people make a living off this type of stuff... allegedly.

Sami said...

that is true. the trade can be only profitable as long as you can sustain.

Colin said...

Take over premium. The market is not prepared to sell out of a sector that is, historically at least, undervalued. The sector should see massive consolidation as only the strongest will survive. Canada is ripe for this play. Exxon has it right.

Sami said...

I guess XTO takeover today prove it. I am looking at Encana as it has spun off its oil unit and should a pure play gas. It is cheap given its cash flow and production growth profile.