What Lies Ahead For Natural Gas ETFs? [United States Natural Gas Fund, LP, First Trust ISE Revere Natural Gas (ETF)]

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May 2, 2014 10:09am NYSE:FCG NYSE:UNG

natural gasSweta Killa: Natural gas has seen solid trading so far this year, gaining in double digits. This is primarily thanks to the coldest winter in decades that send heating demand (and thus natural gas usage) soaring.

After all, about half of U.S. households use natural gas as the primary source of heating.

In fact, United States Natural Gas Fund (NYSEARCA:UNG) has been the star performer in oil & gas ETF world, while First Trust ISE-Revere Natural Gas Index Fund (NYSEARCA:FCG) is leading the broad energy space. This is especially true as UNG gained more than 27.5% in the year-to-date time frame and FCG is up 15.4% for the same time period.

This trend is likely to continue in to the spring based on the broad commodity trends and supply/demand balance. As per the latest EIA storage report, natural gas stockpiles rose 49 billion cubic feet for the week ending April 18. Though this is above the analyst expectation of 42 billion cubic feet, inventory declined 48% from the year-ago level and 53% from the five-year average.

Weekly gas inventories represents the lowest level in 11 years, suggesting slowdown in replenishment of gas stockpiles and raising concerns that the energy companies might not be able to rebuild inventory to levels high enough to meet demand next winter.

Further, the outlook for the weather over the next 15 days calls for slightly cooler than normal temperatures, indicating that the demand for natural gas usage for heating would continue to rise adding to stockpile woes.

In particular, the Midwest and eastern regions of the U.S. will see below-average temperatures in the next six to 10 days, according to Commodity Weather Group. This would result in increasing natural gas price in the coming days despite the U.S. huge fracking boom.

In order to take advantage of this surge in natural gas prices, investors should consider FCG over UNG. This is because FCG has bucked the trend of lagging UNG over the past one month and risen about 7.7% compared to the 5.8% gain for UNG (read: 3 Low Correlated ETFs Surging in Shaky Markets).

Investors should note that FCG has hit a 52-week high of $22.90 on April 24 and is currently trading 31.6% below the record high reached in June 2008, suggesting that it still has room for further upside. This is especially true given the fund has a decent Zacks ETF Rank of 3 or ‘Hold’ rating.

FCG in Focus

This product offers exposure to the U.S. stocks that derive a substantial portion of their revenues from the exploration and production of natural gas. It follows ISE-REVERE Natural Gas Index and holds 30 stocks in its basket, which are well spread out across all the securities in the basket.

Goodrich Petroleum, Comstock Resources and Stone Energy occupy the top three positions in the portfolio with a combined 14% of total assets. This indicates that no single company dominates the fund’s return, preventing heavy concentration.

The fund has a blended style and is also diversified across various market cap levels with 44% in large caps, 38% in small caps and the rest in mid caps (read: 2 Top Ranked Large Cap Growth ETFs in Focus).

The fund has amassed $517.7 million in its asset base while it sees solid volume of more than 517,000 shares per day. The ETF charges 60 bps in annual fees from investors.

What Lies Ahead?

If slightly cold weather or below-average temperatures persist, then it could eat away more natural gas inventories, leading to a smaller supply of natural gas heading into the summer. But with the new technologies and fracking methods, producers might be able to obtain more natural gas from the ground, indicating that the threat of supply shortage might not last for long.

However, normal temperatures heading into summer and higher domestic production are still yet to refill the depleted storage levels. As such, bullish investors could definitely make a short-term play on the natural gas equity ETFs given below-than-normal temperature forecast in the near term and lower stockpile injections.

This article is brought to you courtesy of Sweta Killa.

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