Staying ahead of natural gas

GUEST COLUMN

In May 2007, another seasonal quote, "Sell in May and go away," got trashed.

Markets did not fall. But as we have explained on earlier occasions, the relationships have become more relative. And it's not easy to see where the oil is leaking from the barrel.

Without a grasp of the big picture and a smell for detail, holding on to wealth is an illusion, which cannot keep us up on the cloud for long. Reality check will be harsh even if it means changing "May blues" to "Jun cues".

Intermarket linkages are a way to keep ahead of the market and interpret asset classes earlier in the trend and before the noise.

Natural gas is one such energy asset we have been covering since September last year from near $4 a million British thermal unit to the current $7. We still believe natural gas is a winner and has a potential to move to as high as $20 in 2008. This is a sizeable move, not only from $4 but also if we consider any equity drawdown in coming months till 2008.

Just to clarify, one can plot two simple ratio lines. One charts the Sensex and the BSE Oil index and the second charting Reliance Natural Gas and BSE Oil.

The first relative performance chart between Sensex and BSE Oil clearly highlights that though the Sensex did not fall in May 2007, in relative terms May 2007 was the first time since November 2004 that Sensex underperformed the BSE Oil sector. And if the trend is to be believed, BSE Oil should continue to outperform the broader market in India. We still need more oil than technology, if we have to grow.

The other relative chart between Reliance Natural Gas and BSE Oil makes a stock-picker's life a bit simpler. Just like BSE Oil outperformed the Sensex after nearly three years of underperformance, Reliance Natural Gas broke out of one-year resistance line against BSE Oil last month, yes in May.

From Rs 23, a month back, the stock is already up 50 per cent. Even MCX natural gas June futures should hold recent lows near Rs 310. So as you see, staying ahead of natural gas needs more than a proverbial review of "sell in May and go away".

The writer is CEO, Orpheus Capitals, a global alternative research company