We've been marveling at the surging investment interest in natural gas recently (see "(Natural) Gas Pains?"), most especially manifested through the United States Natural Gas Fund (NYSE Arca: UNG).

As we pointed out, that investors are flocking to UNG in such large numbers now is paradoxical. After all, natural gas has not been kind to bulls this year. In the first six months of 2009, front-month futures prices have slumped nearly 32%. Due to a sometimes-virulent contango (back-month premium), first-half losses in the UNG share price exceeded 40%.

The fact that there's a contango of such magnitude - at last look, the quarterly premium was 30% of the front-month price - should give bulls pause. A large contango for a storable commodity such as natural gas implies more-than-adequate supplies.

At the least, the current interest in natural gas seems premature given the commodity's inherent seasonality. Natural gas is primarily a heating fuel. Generally, gas is injected into storage during the nonheating season (between April and October). The fuel's then withdrawn from storage over the balance of the year; that is, in the heating season (November through March).

Now, check your calendars. It's still summer: the nonheating season. Is it any wonder gas prices continued to swoon in July? Just since the end of the first half, August futures have dipped more than 10%; UNG's lost more than 12%.

There is hope for bulls, though, if they can be patient. There is a bottom in sight. The bottom, however, may not be readily seen unless you compare a few apples to oranges or, rather, natural gas to crude oil.

A little arithmetic is necessary, though, because natural gas is priced in dollars per million British thermal units (mmBTU), while crude's denominated in barrels, or lots of 42 U.S. gallons. By pricing natural gas and crude oil on an energy-equivalence basis, you can determine the market's bias.

One barrel of crude oil, on average, supplies 5.8 mmBTU, so an energy-equivalent cost can be approximated by dividing the crude oil price by 5.8.

The August delivery of West Texas Intermediate crude settled at $62.93 Tuesday, putting energy equivalency at $10.85 per mmBTU. Now, take a look at August natural gas prices. Yesterday, Henry Hub futures settled on NYMEX at $3.43 per mmBTU, a $7.42 discount. That does make natural gas seem cheap, doesn't it?

Not as cheap as last summer, though. Back then, natural gas futures were trading at some of the steepest discounts seen in several years. One year ago, in fact, the discount was $11.40 per mmBTU, just a week ahead of a summertime nadir of $13.11.

If history is any guide, then, we're close to a bottom. Historically, however, that doesn't necessarily mean the natural gas discount will immediately evaporate. It tends to erode gradually in the summer months. Typically, the dramatic stuff doesn't occur until after Labor Day. After that, the discount tends to be cut drastically, and natural gas prices can, in fact, move to a premium over crude oil.

Since 1994, the differential has run from a discount as deep as $13.19 per mmBTU, or $76.50 per barrel-equivalent, to a premium of $5.41 per mmBTU ($31.40 per barrel-equivalent).

Energy-Equivalent Spreads: Natural Gas Vs. Crude Oil

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