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The Commodity Investor Q&A

By Matt Badiali, editor, S&A Resource Report
Wednesday, October 15, 2008

Q: Matt... I remember you telling me that natural gas was cheap in relation to oil. Is that still the case now? Do you think natural gas will hold up better than oil if we get a whopper of a recession? – A.L.

 
A: Traditionally, a barrel of oil sold for about six times the price of an mcf (1,000 cubic feet) of natural gas. That's the standard ratio accepted by the industry. However, over the last 10 years, oil's been more expensive, selling for a ratio of about eight to one.
 
Today, the price of a barrel of oil is around 12.5 times the price of an mcf. So natural gas is still cheap. The ratio fluctuated wildly this summer. It was as low as 10 to one in June and as high as 15 to one in August.
 
While the ratio tells us natural gas is cheap compared to oil, it doesn't really tell us how the price will fare in a recession. For that information, you need to understand how we use natural gas...
 

Use

Oil

Natural Gas

Transport

70%

3%

Industrial

24%

34%

Residential

Less than 5%

22%

Electricity

2%

30%

Source: Energy Information Administration
 
Source: Energy Information Administration
In a recession, both transportation and industrial activity will fall. Those two categories make up 94% of oil's use... but only 37% of natural gas' use.
 
Residential use of natural gas is for cooking, heating, and hot water. While people will reduce home energy use during a recession, it won't be enough to make a significant impact on demand. So at these prices, natural gas will hold up much better than oil in a recession.
 
Q: Nickel has given up all of the gains it made from 2005-2007 (350%)... Is there any hope at all for base metals? Nickel? Zinc? Copper? – J.S.
 
A: Monday's stock rally shows us that someone thinks there is hope for the base-metal complex. Base-metal prices rose along with stocks.
 

Metal

Price Change Monday

Nickel

4%

Copper

6%

Zinc

8%

Lead

1%

Aluminum

3%

 
Stocks move like cars on a highway. While they do act on their own, they tend to move with traffic. That's what we've seen lately, as stocks rally and fall based on sentiment rather than underlying value.
 
Metal prices move like ocean liners. They take a long time to get going, and they take time to change direction. So, Monday's rally in both base metals and stocks was like seeing the Queen Mary make a hard right turn.
 
But base metals didn't rise by all that much. And a similar rise occurred back in late September before the group resumed its slide. So I'm not convinced this is the start of a long-term turnaround.
 
Base-metal prices will live or die with the global economy. If we slide into recession and global consumption nosedives, then metal prices will fall.
 
Another point to remember is that as the prices of these metals rose over the last few years, companies put higher-cost mines into production. Now, as prices decline, companies will shut those mines down. Companies' earnings are going to fall off the table. Share prices will continue to fall as well. That's why I'm staying away from base-metal miners right now.
 
Good investing,
 
Matt




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Crude oil at $78... falling back to yearly low.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1223.12 -0.1% +10.6%
Oil 38.22 -0.2% -0.3%
Gold 139.11 +0.8% +22.3%
Silver 29.51 +3.2% +62.6%
US-Dollar 79.17 -1.3% +4.3%
Euro 1.33 -0.8% -10.4%
Volatility 18.02 +0.1% -15.2%
Gold Stocks 590.99 +1.6% +25.5%
10-Year Yield 2.94 -2.7% -15.5%

World ETFs
Symbol Price
Change
52-Wk
USA 122.76 -0.1% +10.6%
Canada 30.56 +0.2% +18.0%
Russia 21.98 +0.2% +17.2%
India 37.92 +0.2% +19.4%
Israel 16.76 +0.4% +10.4%
Japan 10.69 +0.5% +7.0%
Singapore 13.71 -0.2% +18.1%
Taiwan 14.92 +1.0% +20.2%
S. Korea 57.19 -0.2% +21.5%
S. Africa 72.26 +0.5% +29.7%
China 43.84 -1.3% -3.3%
Lat.America 53.21 +0.1% +9.2%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.74 +0.1% +20.2%
Big Pharma 63.99 -0.2% -3.2%
Internet 72.58 +0.7% +25.0%
Semis 16.18 -0.3% +26.4%
Utilities 31.19 -0.3% +1.8%
Defense 18.47 -0.3% +8.9%
Nanotech 10.08 +0.5% +1.3%
Alt. Energy 10.24 +1.6% -2.0%
Water 18.62 +0.7% +13.8%
Insurance 16.08 -0.4% +19.0%
Biotech 20.56 +0.1% +26.6%
Retail 19.59 -0.6% +26.6%
Software 24.65 -0.6% +22.7%
Big Tech 53.85 0.0% +22.1%
Construction 13.20 +0.8% +14.8%
Media 13.73 +0.7% +24.7%
Consumer Svcs 67.38 0.0% +23.4%
Financials 55.01 -0.1% +5.7%
Health Care 63.90 -0.6% +1.2%
Industrials 63.51 -0.1% +19.3%
Basic Mat 74.64 +0.4% +27.8%
Real Estate 55.35 +0.1% +21.8%
Transportation 91.39 -0.4% +23.9%
Telecom 22.65 +0.3% +16.8%