How To Play The Big Natural Gas Rally With ETFs

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December 8, 2016 7:37am NYSE:UNG


From Zacks: Finally, winter has heated up natural gas prices, putting an end to the struggles of the commodity. Among the issues hurting the broader energy space, ample supplies and falling demand on global growth worries were primary.

However, the forecast of “below-normal temperatures over much of the country into the third week of December” lately sent gas prices soaring to a two-year high. As per the Wall Street Journal, parts of the Great Lakes, the upper plains and the northern Rockies may suffer extremely low temperatures.

Normally, Arctic Chills give life to this commodity every winter. The cold snap boosts electricity demand across the region putting natural gas in focus. In fact, in 2014, the Polar Vortex caused natural gas prices to jump over 50%. As almost 50% of Americans use natural gas for heating purposes, withdrawals in natural gas supplies push up the commodity’s prices (read: Cold Snap Warms Up Natural Gas ETFs).

Apart from this, higher export is believed to be the other reason for the surge. S&P Global Platts reported an average of 7.4 billion cubic feet of gas exported per day in November by the U.S. against 7 billion per day of import. Most of the export went to Mexico and Canada. The U.S. got the status of net exporter back for the first time in 60 years, as per the source.

The dual dose of sub-zero temperatures (if seen in the coming days) and rise in exports may bring a great deal of luck for natural gas, albeit for the short term.

ETF Impact

An ETF tracking the natural gas futures – United States Natural Gas Fund UNG – added about 22.5% in the last one month. iPath Bloomberg Natural Gas Subindex Total Return ETN (GAZFree Report) was up 46.2% in the last 30 days (as of November 6, 2016) (see all energy ETFs here).

Investors should note that natural gas equities, such as First Trust ISE-Revere Natural Gas Index Fund (FCGFree Report) also tacked on 17.7% gains in the last one-month period (as of December 6, 2016) (see all Energy ETFs here).

Can the Rally Continue?

Though there have been some incredible price increases lately in the natural gas market, the commodity may set for a price reversal. Winter is expected to moderate across the country with the advent of spring and natural gas demand will trip up then.

This is truer in the light of the fact that the present stockpiles are still 6.3% higher than the five-year average and 0.6% higher than the year-ago level. As per an article published in the Wall Street Journal, “stockpiles are still at record highs for this time of year.” So, investors solely relying on a weather play might proceed with a short-term notion.

So, still-elevated inventory, the likely usage of coal as a relatively cheaper power-generating ingredient at power plants and profit booking activity after such a steep rally in natural gas may halt the exponential price rise in the coming days.

Investors should also note that since Mexico and Canada attracted the natural gas exports of the U.S. mainly, the export story might turn dour in the Trump administration. Trump may spoil trade relations with both the countries and build a wall along the Mexico border as part of his immigration strategy (read: Foreign ETFs to Win or Lose on Trump Victory).

All in all, if the winter chill sticks around, natural gas exchange-traded products are likely to rally longer. Over the long term, things are still unclear.

This article is brought to you courtesy of Zacks Research.

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