Sweta 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.