Natural gas prices have been dropping as of late which we have found is a direct result of new technologies opening up previously inaccessible domestic natural gas reserves. Gas prices rose a few years back over concerns that domestic natural gas reserves were being depleted and the gap was going to have to be filled with more expensive imported sources, but the rising prices led to new technologies that opened up previously unaffordable domestic natural gas reserves. As the supply of natural gas rose, prices fell.
The pitfall to the current low natural gas prices is the sustanability of these low prices to continue. As the higher prices lead to the new technologies allowing for drillers to tap into non conventional natural gas resources, lower natural gas prices limit the money available to tap into future gas deposits. We have found that unconventional shale gas wells deplete very rapidly, paying out 60 to 90% of their production in the first year. It takes a great deal of drilling to maintain overall production rates, and in a low-price environment like today’s, the prospects for additional drilling are dubious. The longer prices remain too low to sustain increased drilling, the more tension there will be for the price to slingshot. Combine that with the governments push to offer credits towards natural gas vehicles, and a recovery in manufacturing, and the demand could well exceed the current natural gas reserves.
The outlook for low natural gas prices seems dim. What better time to introduce a new vehicle to invest in natural gas. With all of the controversy surrounding the United States Natural Gas Fund (UNG) just barely in the rear view mirror, UNG’s sponsor is launching yet another natural gas ETF this Wednesday. This ETF aims to mitigate the effects of contango. When a commodity is in contango, the cost of a near-month contract is cheaper than a far-month contract. As US Commodity Funds did with oil, introducing of the United States 12 Month Oil Fund, LP (USL) , the fund generally will hold a complete basket of the next 12 months’ futures contracts (as opposed to UNG, which simply holds the upcoming month). Two weeks before the expiration of the nearest-month contract, the fund will roll forward another month, picking up the then-12-months-out contract.
The net assets of the “United States 12 Month Natural Gas Fund” will consist primarily of investments in futures contracts for natural gas, crude oil, heating oil, gasoline and other petroleum-based fuels that are traded on the New York Mercantile Exchange (the “NYMEX”), ICE Futures (formerly, the International Petroleum Exchange) or other U.S. and foreign exchanges (collectively, “Futures Contracts”) and other natural gas-related investments such as cash-settled options on Futures Contracts, forward contracts for natural gas, cleared swap contracts, and over-the-counter transactions that are based on the price of natural gas, crude oil and other petroleum-based fuels, Futures Contracts and indices based on the foregoing (collectively, “Other Natural Gas-Related Investments”). For convenience and unless otherwise specified, Futures Contracts and Other Natural Gas-Related Investments collectively are referred to as “Natural Gas Interests” in this prospectus. The General Partner is authorized by the “United States 12 Month Natural Gas Fund” in its sole judgment to employ, establish the terms of employment for, and terminate commodity trading advisors or other futures commission merchants.
The “United States 12 Month Natural Gas Fund” will invest in Natural Gas Interests to the fullest extent possible without being leveraged or unable to satisfy its current or potential margin or collateral obligations with respect to its investments in Futures Contracts and Other Natural Gas-Related Investments. The primary focus of the General Partner will be the investment in Futures Contracts and the management of investments in short-term obligations of the United States of two years or less (“Treasuries”), cash and/or cash equivalents for margining purposes and as collateral.
The investment objective of the “United States 12 Month Natural Gas Fund” is to have the changes in percentage terms of its units’ net asset value (“NAV”) reflect the changes in percentage terms of the spot price of natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in the average of the prices of 12 futures contracts on natural gas traded on the NYMEX (the “Benchmark Futures Contracts”), consisting of the near month contract to expire and the contracts for the following eleven months, for a total of 12 consecutive months’ contracts, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contracts that are the next month contract to expire and the contracts for the following eleven consecutive months, less the “United States 12 Month Natural Gas Fund” expenses. When calculating the daily movement of the average price of the 12 contracts, each contract month will be equally weighted. It is not the intent of the “United States 12 Month Natural Gas Fund” to be operated in a fashion such that its NAV will equal, in dollar terms, the spot price of natural gas or any particular futures contract based on natural gas.
The General Partner believes that holding futures contracts whose expiration dates are spread out over a 12 month period of time will cause the total return of such a portfolio to vary compared to a portfolio that holds only a single month’s contract (such as the near month contract). In particular, the General Partner believes that the total return of a portfolio holding contracts with a range of expiration months will be impacted differently by the price relationship between different contract months of the same commodity future compared to the total return of a portfolio consisting of the near month contract. For example, in cases in which the near month contract’s price is higher than the price of contracts that expire later in time (a situation known as “backwardation” in the futures markets), then absent the impact of the overall movement in natural gas prices the value of the near month contract would tend to rise as it approaches expiration. Conversely, in cases in which the near month contract’s price is lower than the price of contracts that expire later in time (a situation known as “contango” in the futures markets), then absent the impact of the overall movement in natural gas prices the value of the near month contract would tend to decline as it approaches expiration. The total return of a portfolio that owned the near month contract and “rolled” forward each month by selling the near month contract as it approached expiration and purchasing the next month to expire would be positively impacted by a backwardation market, and negatively impacted by a contango market. Depending on the exact price relationship of the different month’s prices, portfolio expenses, and the overall movement of natural gas prices, the impact of backwardation and contango could have a major impact on the total return of such a portfolio over time. The General Partner believes that based on historical evidence a portfolio that held futures contracts with a range of expiration dates spread out over a 12 month period of time would typically be impacted less by the positive effect of backwardation and the negative effect of contango compared to a portfolio that held contracts of a single near month. As a result, absent the impact of any other factors, a portfolio of 12 different monthly contracts would tend to have a lower total return than a near month only portfolio in a backwardation market and a higher total return in a contango market. However there can be no assurance that such historical relationships would provide the same or similar results in the future
It is not the intent of the “United States 12 Month Natural Gas Fund” to be operated in a fashion such that its NAV will equal, in dollar terms, the spot price of natural gas or any particular futures contract or contracts based on natural gas. The “United States 12 Month Natural Gas Fund” will invest in interests other than the Benchmark Futures Contract to comply with accountability levels and position limits.
For the full prospectus click: HERE
See all our Natural Gas Related Content: HERE
You should also be able to find more information on USCF’s website soon, click: HERE