Natural Gas and Oil Spread: Opportunity or a Pain Trade?

By Wesley Gray, PhD|October 5th, 2012|Research Insights, Trend Following|

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

The chart above (with my annotations on the far right) is from a research piece by The Carlyle Group.

From 1997 to 2005 oil and natural gas sat roughly at parity on an energy-adjusted basis. The spread widened thereafter, but came back in line when oil crashed.

Now we face the most epic spread in history.

Question: Is this one of the greatest opportunities in history? Or is this going to go down as the biggest “pain trade” of all time?

http://www.businessinsider.com/nomura-on-shorting-japanese-government-bonds-2012-10

About the Author: Wesley Gray, PhD

After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.