Behind The Recent Jump In Natural Gas ETFs

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August 26, 2013 4:43pm NYSE:BOIL NYSE:UGAZ

natural gasAfter leading the commodity world to start 2013, natural gas has faced some severe weakness this summer. The important commodity is used as an input for power plants, but with a cool summer the demand hasn’t been there

(see A Month to Forget for Natural Gas Investors).

This has allowed natural gas supplies to build at a solid rate and it has kept natural gas prices under pressure as well. However, a recent EIA report along with a hot weather forecast could help to boost natural gas prices off of their lows and get the commodity back into a more favorable trading range once more.

Behind the Jump in Natural Gas

The central reason for the natural gas jump lately has been a forecast of a heat wave across the Midwestern U.S. In fact, temperatures could be 10 degrees more than average in Chicago at the end of the month, while other Midwestern cities could see similar levels above normal as well.

This burst of heat, after such a temperate summer so far, could boost demand for air conditioning, thus increasing electricity usage. Should this happen, we could see demand pick up for natural gas as well, helping to carry prices higher for this important power plant input.

Meanwhile, the latest EIA natural gas report regarding storage of the commodity showed a weekly increase of 57 billion cubic feet (bcf). This compares favorably to last week’s injection of 65 bcf, though the total amount in storage is just over three trillion cubic feet (3.063 to be exact).

While this does compare somewhat unfavorably with the year ago period, it does continue a solid trend in the space of smaller injections. Plus, it does move the injections in line with year ago figures, and with heat in the forecast, we could see smaller supply increases in the weeks ahead as well.

Market Impact  

This news has helped to boost natural gas futures over the past few sessions, pushing the commodity up several percentage points on the day. In fact, front month natural gas futures are now trading at the $3.50/mmBTU level, a solid increase of about 30 cents in just the past few weeks.

The reports also led to a surge in the natural gas ETF world with several products rising over the past few sessions. Below, we look at some of these options and how they have performed in light of these new, positive trends in the space:

United States Natural Gas Fund (UNG)

This ETF is the most popular one in the natural gas space, with average volume of about 5.2 million shares a day. The product focuses on front month contracts in natural gas delivered to Henry Hub Louisiana for its exposure (read Forget UNG: Try These Natural Gas ETFs Instead).

Thanks to recent trends in the space, UNG has added about 7% in the past 10 days, making it a solid outperformer in the time frame.

United States 12 Month Natural Gas Fund (UNL)

This is a more spread out version of UNG, holding futures contracts for each of the next 12 months for natural gas. The approach can help to fight contango, though it may underperform when markets are in backwardation or are especially bullish for front month futures.

Investors have seen some of this underperformance lately, as UNL has added 5.8% in the past ten days. However, it is worth noting that the product has outperformed UNG in the trailing one month time frame by a good sized margin.

ProShares Ultra DJ-UBS Natural Gas (BOIL)

For a leveraged option on the space, investors could consider BOIL, a product that uses 2x daily resetting leverage. This daily resetting and high volatility makes the product unwise for long term investors, though with an average volume of about 170,000 shares a day it could be a decent pick for those in it for the short term.

This 2x product has had a great run over the past two weeks, as BOIL has jumped by about 12.9% in the time frame (read The Comprehensive Guide to Natural Gas ETFs).

VelocityShares 3x Long Natural Gas ETN (UGAZ)

If 2x trading isn’t enough for you, VelocityShares has UGAZ as a 3x choice. This product follows natural gas futures as well, though with 300% daily resetting exposure. This makes UGAZ an extremely volatile product, though average daily volume of over 700,000 shares makes it a solid bet for traders with a bullish view on natural gas in the short run.

Thanks to the bullish run for natural gas, UGAZ has seen great trading and is now up 20.9% in the past two weeks.

Bottom Line

It has been a rough stretch for natural gas as the weather has not cooperated with the commodity. A cool summer has hurt demand for electricity, keeping natural gas under pressure for most of the past few weeks.

However, recent trends in the space have been encouraging to say the least. A solid EIA report along with a heat wave could boost prices for natural gas ETFs heading into Labor Day, suggesting that this space might be worth a closer look if current conditions remain in place for this corner of the energy market.

This article is brought to you courtesy of Eric Dutram.

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