Oil is trading at 18 times the value of natural gas. Compare that to historical ratios of 8.6 since 1994. The problem is oversupply. But when you consider that natural gas is clean burning and environmentally friendly, it is hard to make a long-term bearish case for natural gas. More likely we will see natural gas prices and oil prices make their way back to historical ratios. Which means oil prices can decline or natural gas prices can rise.

From all reports, it appears that oil prices are also firming. Mainly on the back of increasing demand supported by a global economic recovery. According to The Wall Street Journal, futures markets are pricing December 2010 natural gas contracts at $7.25 per million btu, implying an oil/gas price ratio of 10.8. Assuming of course, that oil prices remain stable.

If you buy into the upside potential of natural gas and if you like aggressive strategies, then you might look at buying longer term calls on Talisman Energy Inc. (TSX: TLM, recent price $16.40) or Canadian Natural Resources Ltd. (TSX: CNQ, $59.64).

If you like Talisman, then you might consider the TLM January (2011) 17 calls trading at $3.60. With Canadian Natural Resources, I would look at shorter term options, mainly because of the wide bid asked spread that exists with the 2011 contracts. You should be able to buy the CNQ January 60 calls (i.e. expiring in January 2010) at $8.00 per share or less.