2013 started off on a strong note for natural gas, one of the few solid performers in the natural resource world. But the commodity showed a sharp pullback in the last few months due to the broad commodity sell-off trends and natural gas specific concerns such as excess supply and sluggish demand.
Latest EIA storage report
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. Additions hit 58 bcf, following a 67 bcf injection the week before, pretty large numbers considering it is the heart of summer (read:Natural Gas ETFs Slide on Bearish Storage Report).
And while temperatures have begun to pick up in some parts of the Midwest and Northeast, the summer has been pretty mild overall. There have been a host of above-average supply injections as of late, and with an end to summer weather fast approaching, we could be in for more supply injections in the weeks ahead as well.
Additionally, natural gas stocks currently total 3,188 bcf, which is now slightly above the five year average.
Near Term Natural Gas Outlook
This trend is expected to spill over to the tail end of the summer, though there is some hope for hotter weather in key regions of the country. However, if these forecasts do not pan out, more people are unlikely to turn on air conditioning, thereby limiting electricity demand in the coming weeks.
Since roughly one-fourth of all U.S. electricity is generated via natural gas, a drop in electricity demand can have a huge impact on the usage of this energy source.
Furthermore, with natural gas futures usually in a state of contango, longer term bets on the commodity tend to be tough for the bulls. Longer dated futures are usually more expensive, so rolling over contracts can be difficult to do at a profit, once again favoring the bears.
Given this, along with the bearish inventory report and the possibility of mild weather, natural gas ETFs may fall further, extending the brutal trading pattern to the fall as well. This is especially true considering the magnitude of the supply injections of late, and the trend that is building for this metric (read: The Comprehensive Guide to Natural Gas ETFs).
In such a backdrop, any of the short natural gas ETF plays could be better options for investors who are bearish right now, given the supply/demand imbalance and the long history of natural gas weakness in the ETF world:
VelocityShares 3x Inverse Natural Gas ETN (DGAZ)
The ETN provides inverse (opposite) exposure to three times (300%) the daily performance of the S&P GSCI Natural Gas Index Excess Return plus returns from U.S. T-bills net of fees and expenses.