“A grim outlook on the long-term prices of natural gas certainly would weigh on shares of (UNG), which use near-month futures contracts to gain exposure to the commodity. But the strategy now being used by producers is not the only factor to consider. An inversion of the futures curve could provide some much-needed relief to investors who have been burned by the fund in 2009,” Michael Johnston Reports From ETF Database.
“Despite rises in natural gas prices this year, investors in (UNG) have seen returns eroded by contango in futures markets, as any price increases fell short of those implied by the upward-sloping futures curve. Due in large part to seasonal factors, but influenced by the aforementioned factors that could weigh on (UNG), the contango in natural gas futures markets has flipped, at least in the short-term,” Johnston Reports.
“While the backwardation now showing in the market is indicative of an expected decline in prices among investors, it could potentially good news for (UNG). If prices remain stable, or even increase, the fund will be able to roll its holdings at a profit, selling near-month contracts for more than the price of second-month contracts it must buy to maintain exposure. (UNG) was one of the most volatile ETFs in 2009 (see UNG’s Wild Year), and with so many complex forces driving the price of this fund, there’s little reason to believe that 2010 won’t bring more of the same,” Johnston Reports.
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