Natural gas prices may have finally bottomed based on their technical outlook. As you are probably all too well aware, after following oil prices higher into July 2008, natural gas prices have experienced a two-year decline due to supplies exceeding demand. 

Henry Groppe, the highly-experienced oil and gas guru with Groppe Long & Little, believes that natural gas prices are headed higher later this summer – to above US$8 per million BTUs – on the basis that shale gas deposits are unlikely to add significantly to North America’s depleting natural gas reserves. Steep reductions in exploration and development should also tilt supply-and-demand towards a state of equilibrium. 

Based on a review of the United States Natural Gas Fund (NYSE:UNG), an ETF that tracks NYMEX prices for natural gas, the units of that ETF recently appeared to have broken out from a downward price channel (see chart below). 

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If the prices of (NYSE:UNG) ETF units fail to find support along the top trend line in the chart above (at about $7.25 to $7.50) then the recent price activity will turn out to be a false break out. The Bollinger Bands shown on the chart above have pinched, which usually foreshadows that either an abrupt upward or downward move is about to occur. 

On the short-term price chart, (NYSE:UNG) ETF unit prices appear to have formed a bottom at $6.75 with resistance at $7.75 despite what appears to have been a break out to $8.75 (see chart below). Should the $6.75 support level fail to hold then the downward price trend is still intact. If the $7.75 resistance level is penetrated, then a significant price reversal may occur. Although the On Balance Volume (technical indicator where volume increases precede price changes) is starting to improve, the RSI (a momentum oscillator that measures the relative strength of the price of a security or, in this case, a commodity against itself) and MACD (a momentum oscillator that measures price divergence of moving averages to determine if a trend is about to slow or reverse) are both weak but improving. In any event, a test of the $6.75 support level over the next few weeks is a strong possibility. 

 

Many sophisticated traders have found themselves on the wrong side of a natural gas trade, so it is too early to conclude that prices have bottomed. Perhaps the return of natty traders from their summer vacations will be the catalyst for higher prices in the months ahead. 

Conclusion: Watch to see whether (NYSE:UNG) ETF’s unit prices hold the $6.75 support level and manage to penetrate the $7.75 resistance level. A move above $8.75 – the height of the June price advance – would be bullish and may precede a more significant price move in the fall. 

Written By Brian Hoffman From Oil and Gas Investments Bulletin 

Brian Hoffman, CA, CPA, an affiliate of the Market Technicians Assoc. and a member of the Canadian Society of Technical Analysts. He is an occasional contributor to Oil and Gas Investments Bulletin 

Disclosure: neither Mr. Schaefer nor Mr. Hoffman own UNG or any derivatives on it 

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ETFs offer an easy way to play Natural Gas and there are many options available besides the most popular US Natural Gas ETF (NYSE:UNG).  We have listed some other options for investors to look at and compare to one another below.  Note that we have listed some industry related ETFs as well as direct Natural Gas exposure plays excluding any leveraged ETFs.  You can also visit our U.S. Natural Gas ETF (NYSE:UNG) category for more insight. 

United States Natural Gas Fund (NYSE:UNG)            

The United States Natural Gas Fund, LP (NYSE:UNG) is a new way for investors and hedgers to manage their exposure to energy. The United States Natural Gas Fund LP (NYSE: UNG) is an exchange traded security that is designed to track in percentage terms the movements of natural gas prices. UNG issues units that may be purchased and sold on the NYSE Arca. The investment objective of UNG is for the changes in percentage terms of the units’ net asset value to reflect the changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in the price of the futures contract on natural gas traded on the New York Mercantile Exchange that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire, less UNG’s expenses.  

United States 12 Month Natural Gas (NYSE:UNL)            

The investment seeks to reflect the changes, net of expenses, of the spot price of natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in the average of the prices of 12 futures contracts on natural gas traded on the NYMEX. The fund will consist of the near month contact to expire and the contracts for the following eleven months, for a total of 12 consecutive months contracts, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire and the contracts for the following eleven consecutive months.            

iPath DJ-UBS Natural Gas TR Sub-Idx ETN (NYSE:GAZ)            

The investment seeks results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones-UBS Natural Gas Total Return Sub-Index. The note is designed to reflect the performance of natural gas. The index is composed of the Henry Hub Natural Gas futures contract traded on the New York Mercantile Exchange.            

First Trust ISE-Revere Natural Gas Idx (NYSE:FCG)            

The investment seeks to replicate, net of expenses, the ISE-REVERE Natural Gas index. The fund invests at least 90% of assets in common stocks that comprise the index. The index is an equal-weighted index that consists of exchange-listed companies that derive a substantial portion of their revenue from the exploration and production of natural gas. The fund is nondiversified.            

iShares Dow Jones US Oil Equipment Index (NYSE:IEZ)            

The investment seeks results that correspond generally to the price and yield performance of the Dow Jones U.S. Select Oil Equipment & Services index. The fund generally invests at least 90% of assets in securities of the Underlying index and depositary receipts representing securities of the Underlying index. It may invest the remainder of assets in securities not included in the Underlying index but which BGFA believes will help the fund track Underlying index, and in futures contracts, options on futures contracts, options and swaps as well as cash and cash equivalents, including shares of money market funds advised by BGFA. It is nondiversified.            

Jefferies | TR/J CRB Wildcatters Exploration & Production Equity ETF (NYSE:WCAT)            

The investment seeks investment results that replicate as closely as possible, before fees and expenses, the price and yield performance of the Thomson Reuters/Jefferies CRB Wildcatters Energy E&P Equity index. The fund normally invests at least 80% of total assets in the equity securities that comprise the underlying index and depositary receipts based on the securities in index. The index is designed to track the overall performance of a universe of listed U.S. and Canadian small and mid-capitalization companies engaged in the exploration and production of oil and natural gas. The fund is nondiversified.

UNG