Natural Gas ETF Impact On EIA Storage Report

October 8, 2013 2:59pm NYSE:DCNG NYSE:GAZ

natural-gas-etfCommodity investing has been quite choppy, pretty much across the board. Political gridlock over government funding and the debt ceiling continued to dull the demand for broad natural resources, pushing many commodity ETFs

into the red as of late.

In particular, natural gas showed a sharp pullback over the last two week due to the broad commodity trends and natural gas specific concerns such as excess supply and sluggish demand.

Demand/Supply Imbalance

The bearish trend was reflected in the latest EIA storage report – a key mover of the natural gas markets – in which supplies continued to build for the key fuel. Natural gas stockpiles rose 101 billion cubic feet (bcf) in the week ending September 27, a bit higher than the analyst expectation of 95 bcf.

This follows up a weak report from the previous week in which there was a big supply build too. In that time period, natural gas stockpiles rose 87 bcf, far higher than the analyst expectation of 74–78 bcf.

Recent for the Increase

The main reason behind the surge is that mild weather has dampened the demand for electricity at homes and business. Since roughly one-fourth of all U.S. electricity is generated via natural gas, a drop in electricity demand had a huge impact on the usage of this energy source.

This trend is expected to spill over in the weeks ahead as more mild temperatures are expected across the nation. This would prevent cooling demand—and also warming demand– and put pressure on natural gas (read: Natural Gas ETFs Struggle on Cool Weather Forecast).

Generally, demand for natural gas wanes at the end of summer as hot temperatures recede and people use less fuel. On the other hand, natural gas inventories accelerate before winter heating demand kicks in, and we may now be in that part of the calendar year.

Market Impact

The jump in natural gas inventories and the lack of demand affected natural gas ETFs over the past two weeks. And, ETFs tracking this space could see rough trading in the days ahead given the bearish outlook for the natural resource.

Below, we have highlighted some ETFs that directly deal in the futures market of natural gas. Investors need to take some caution while trading in these in the coming days, and especially so if more supply builds hit in the weeks ahead:

United States Natural Gas Fund (NYSEARCA:UNG)

This fund provides direct exposure to the spot price of natural gas on a daily basis through future contracts. It is by far the most popular and liquid ETF in the natural gas space with AUM of $909.1 million and average daily volume of 5 million shares.

The ETF charges 99 bps in annual fees and expenses. UNG lost about 6.8% in the past two weeks and is just negative in YTD terms.

Teucrium Natural Gas Fund (NYSEARCA:NAGS)

This fund seeks to be a different way to play the natural gas market and reduces the effects of both contango and backwardation. Unlike UNG, the product utilizes four different contracts in order to gain spread out exposure across multiple points on the curve.

The four contracts give the fund a focus on the key times in the natural gas season at both the end and beginning of the heating and cooling seasons.

Despite its unique approach, the fund failed to reach investor interest as depicted by $3.3 million in AUM and just 4,000 shares in average daily volume. Additionally, it is a high cost choice in the space charging about 1.48% in annual fees. NAGS lost over 5.5% in the past 10 trading sessions and it is down 2.25% in the year-to-date time frame.

iPath Dow Jones-UBS Natural Gas ETN (NYSEARCA:GAZ)

This is an ETN option for natural gas investors, delivering returns through an unleveraged investment in the natural gas (currently the Henry Hub Natural Gas futures contract traded on the NYMEX) futures contract plus the rate of interest on specified T-Bills. The product follows the Dow Jones-UBS Natural Gas Total Return Sub-Index (read: 2 Commodity ETFs Offering Investors Sweet Returns).

The note has amassed $33.9 million in its asset base while it trades in moderate volumes of more than 71,000 shares per day. It charges 75 bps in fees per year from investors, while the ETN was down nearly 6.5% in the past two weeks and has fallen 13% so far this year.

Apart from these three products, other unleveraged natural gas ETFs – United States 12 Month Natural Gas Fund (NYSEARCA:UNL) and iPath Seasonal Natural Gas ETN (NYSEARCA:DCNG) – were also down 5.4 % and 7.6%, respectively, in the past two weeks.

Bottom Line

Investors could see more supplies being added in the coming weeks to the vast natural gas stockpile. This, coupled with the forecast for more mild weather could hurt the natural gas ETFs further, extending the brutal trading even further into October.

This suggests that investors might now look elsewhere in the space for their commodity exposure, especially if big supply injections remains the norm in the natural gas market.

This article is brought to you courtesy of Eric Dutram. 

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