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Thursday, March 25, 2010

THIS ENERGY SOURCE IS GETTING CHEAP AGAIN

With stocks and bonds up more than 50% in the past year, we find ourselves looking harder and harder for contrarians ideas... like utility stocks, which we presented last week.

We also find ourselves coming back to the "contrarian's commodity," natural gas. As our colleague Matt Badiali just outlined in Growth Stock Wire, the "clean cousin" of oil is nearing extreme levels of cheapness.

As Matt discusses, a large supply of natural gas has flooded the market in the past few years. This supply surge has altered an old ratio between oil and natural gas. Since these commodities are both used as fuel, they tend to trade in an energy-equivalent ratio.

During the late 1990s to the early 2000s, an oil-to-gas ratio of 12:1 or 14:1 meant natural gas was cheap. But "post supply surge," we need to see an oil-to-gas ratio of 20:1 or 24:1 to say gas is cheap relative to oil. This ratio reached a "super cheap natural gas" reading of 24:1 in the fall of last year. This extreme reading kicked off a more than 100% rally in natural gas... which brought this ratio back to a more normal 14:1.

But in the past few months, natural gas has tumbled more than 30%. This decline has sent the oil-to-gas ratio back into the 20s... near a "super cheap natural gas" level.

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