Natural Gas ETF Jumps on No News - Turning Point?

And it makes no sense
And it makes perfect sense
Alejandro Escovedo

Those of you who read my blog posts have seen several well-reasoned articles explaining why natural gas prices are expected to remain low for a long period of time (Gloomy Natural Gas Outlook and More Natural Gas Gloom). Why then would there be so much recent buying of the United States Natural Gas Fund LP (UNG)?

This fund is an exchange traded security that is designed to track in percentage terms the movements of natural gas prices. As you can see from the chart below, the bad fundamentals from natural gas have been playing out since last July.

We can think of a few reasons to be at least partially optimistic about natural gas.

When a market moves upwards in the presence of lousy news, it often marks a turning point.

Comments

[tunaman4u2:]

Shouldn't have sold my UNG at 13.04 last week! HA! Wish it wasn't such a terrible front month contango crushed instrument. Can't buy & hold it, just can't...

May 11 09:09 AM

[AndrewBaker:]

Based on the charts only, I bought a leveraged long natural gas ETF last week and sold today for a good return. I too think that the recent uptrend against the news and projected figures suggests a turning point, and I will be back in soon, but maybe not leveraged if the stock markets generally come down, which I think they will this week.

May 11 09:11 AM

[Dean M:]

How dare it go up in defiance of your blog posts!

"Those of you who read my blog posts have seen several well-reasoned articles explaining why natural gas prices are expected to remain low for a long period of time (Gloomy Natural Gas Outlook and More Natural Gas Gloom). Why then would there be so much recent buying of the United States Natural Gas Fund LP (UNG)?"

May 11 09:27 AM

[Mad Hedge F...:]

I'm in your camp. Only years of driving around hot, sweaty, dusty roads, wildcatting for good old CH4 in Texas and Colorado, could enable me to make such a call. After one last puke out round of stop loss selling that took it down to an unbelievable $3.22, it soared 36% to $4.38. Chesapeake Energy (CHK) rocketed by 85%, and Devon Energy (DVN) roared by 71%. No doubt that it has been dragged up by crude’s move to $58, kicking and screaming all the way. Although this is not as impressive as crude’s 80% lift off its $32 bottom, it is still one of the most rapid and impressive moves of any commodity this year. You can also bet that every electric power utility in the country was scampering to acquire advance supplies of the clean burning fuel, taking advantage of a rare opportunity to buy at below the cost of production. While the juice may be out of this for a day or weekly trade, natural gas is still a steal at these levels for the long term.

May 11 09:32 AM

[Artistes:]

OK. It's made an initial jump for an apparent turn-around, but where and when do you buy in?

May 11 11:00 AM

[H. T. Love:]

I see a few reasons. First the short bump in oil. If it rises slowly over the next couple of months, it will drag the NG prices with it, a little bit. With everybody and his brother calling for an economic upturn in 2nd half of this year, oil is probably going to the $70-$75 range.

Folks expecting inflation have been pushing commodities prices up generally.

The biggest reason, in my opinion, is the number of wells shutdown and BO's push on clean fuels for the longer term. When heating season approaches later this year it will take time for wells to be restarted to meet increased demand.

Various state regulators are pushing utilities for a "cleaner portfolio" of electricity generation, indicating that some coal generation will be replaced by NG generation.

Adding it all up, folks with longer-term outlooks are taking advantage of the depressed price of the shares.

My Humble Opinion,
HardToLove

May 11 11:14 AM

[H. T. Love:]

On May 11 11:00 AM Artistes wrote:

> OK. It's made an initial jump for an apparent turn-around, but where
> and when do you buy in?

I'm no expert. I should have gotten at $12.80 or so. But looking at the charts, RSI, MACD A/D, MFI. Momentum are all strong. The caution is in the Full Stochastics, which indicate a downturn *may* be nearing.

Unfortunately, all those indicators only show what has happened in recent market sentiment and sentiment, profit-taking, etc., and sentiment can switch quickly.

I went ahead and entered at $16.20, being of a longer-term type, and will get more if it nears support ($12-$13 range). Could've cleared >4% if I was a trader. Last August it was near the $44 range. At current levels, I've no problem entering anywhere in the current range.

If you're a short-term type, I really can't say. But it the charts seem to indicate that there may be a small pull-back. Again, hard to say in these markets.

Again, I'm no expert. Take all the above with a grain of salt. Do your DD. Good luck with it.

HardToLove

May 11 11:31 AM

[Artistes:]

HartToLove:

Thanks for you comments. I'm in agreement with you regarding UNG's recent advance and a prediction of a "small pullback" for several reasons. (1) the price of UNG has come down so far to the point of being dramatically oversold; (2) the price of gasoline has jumped quite a bit in the last week (at least here in Connecticut), thereby confirming support for oil's advancement into the high fifties (I know, it usually goes the other way around - oil goes up and gasoline goes up, especially when we are now in the summer months); (3) BO's clean energy thinking and resulting policy; (4); and technically, there are windows or gaps in the price range of UNG over the last few days. If those gaps hold and are not "filled in," then it will really confirm a true turn-around and breakout.

See what happens tomorrow and Wednesday and then I'll buy in. I'm both a long and short trader, but of course, always looking for the best entry price.

May 11 12:38 PM

[Jim Letourneau:]

Fortunately I hadn't spent weeks researching why natural gas wouldn't recover. I was just linking to other people's hard work.


On May 11 09:27 AM Dean M wrote:

> How dare it go up in defiance of your blog posts!
>
> "Those of you who read my blog posts have seen several well-reasoned
> articles explaining why natural gas prices are expected to remain
> low for a long period of time (Gloomy Natural Gas Outlook and More
> Natural Gas Gloom). Why then would there be so much recent buying
> of the United States Natural Gas Fund LP (seekingalpha.com/symbo...)?"

May 11 02:52 PM

[Billy Ford:]

A couple of things to remember when trading UNG: I actively day traded this since its inception, until last year when I truly understood all the details of the fund. Here are a few things to keep in mind:

1.) UNG is a publicly traded partnership and you will receive a K-1, meaning you will pay taxes on your share of their revenue. Typically these types of funds will pay distributions, so no big deal right? This fund for some reason does not pay distributions, so you basically will pay taxes on 1256 contract income while not receiving a penny... in addition to any ordinary cap gains taxes that you will be required to pay.
2.) Understand how the fund tracks the NG market. Dont compare UNG prices now in relation to where the underlying NYMEX price is versus that of where it was last year when NG was at $????. If you look at the futures contract for the months to come (contango), it would be very easy to see price appreciation on the actual NG side, while seeing modest gains in UNG. The Fund will sell front month contracts and roll over to the next month before expiration without adjusting the price per share of UNG...For instance, if June contract is at $4.45 and UNG is at $16.97, and say the contract expired tomorrow and the July contract was trading at $4.60, then tomorrow UNG would still be at $16.97.....So you can see where you may get appreciation in gas prices while keeping UNG the same....Im not saying that you wouldnt see appreciation in UNG if NG is rising, because you would,,BUT just be aware of this fact.
3.) Commodities will trade WITH equities....As the stock market climbs (+30%) so will CL (crude) and NG..I know that NG has been lagging a bit lately while crude has been climbing, but if you are expecting any kind of major pullback in the equity markets, then I wouldnt suggest not getting into NG..I think it is a bit premature at the moment...

I would recommend if you want to trade energy, try the actual futures contracts...it is very simple to pick up on and very leveraged...all the while paying less taxes..Futures are taxed at 60/40...meaning 60% of gains are taxed at LT rates, while 40% are taxed at ST rates, no matter how long you held the contract for...They have MiNy contracts which will allow you to buy a 1/4 of a full contract requiring less margin to hold the contract..I would definitley research and practice before you dive into it, but I think the upside will be better for you if you want to be speculative and make a lot of money...It is also easier to short contracts, because I always had difficulties shorting UNG...it always said that, "short sales in this security isnt allowed because we are unable to borrow shares" although i did get short a few times...
OR if futures doesnt seem like your thing, then I would just buy a CHK or KWK which fluctuates almost identical with the price of NG....Just my 2 cents

May 12 10:38 AM

[Chris Matus...:]

I question some of futurestrader's analysis about UNG.

First of all, since it is a partnership and it passes on income and capital gains/losses directly to the shareholder, you would get all the same tax advantages as you would if you were to buy the futures contract. The 1256 Contract discussed is the very same 60/40 split mentioned for long/short term capital gains. For this reason, there is no need for them to issue distributions. UNG has no income revenue to speak of. It is all about capital appreciation of the underlying futures contracts.

I highly doubt that an investor in UNG would lose money due to the fact that natural gas is in contango. It makes more sense to me that when rolling over to the next contract UNG would buy the same dollar amount worth of contracts instead of buying the same number of contracts.

I think that for the average investor, or the small investor, it is better to use UNG rather than trade the futures contracts directly. UNG will charge a nominal fee to manage the buying and selling of these contracts for you. Plus, they make it easier to scale into and out of a position without worrying about the actual contract size increments. Best of all, almost every investor already has access to trade UNG on the NYSE.

I would recommend buying UNG or the Natural Gas futures contract now because it is currently at a relatively low price, and we are seeing the beginning signs of an economic recovery. I think there is still risk of a prolonged recovery period, but I wouldn't want to miss out on this rally when it happens. Plus, the long-term demand for Natural Gas looks very promising.


On May 12 10:38 AM futurestrader wrote:

> A couple of things to remember when trading UNG: I actively day traded
> this since its inception, until last year when I truly understood
> all the details of the fund. Here are a few things to keep in mind:
>
>
> 1.) UNG is a publicly traded partnership and you will receive a K-1,
> meaning you will pay taxes on your share of their revenue. Typically
> these types of funds will pay distributions, so no big deal right?
> This fund for some reason does not pay distributions, so you basically
> will pay taxes on 1256 contract income while not receiving a penny...

May 12 04:41 PM

[Maxe Paul:]

With a neverending downhill chart decline it was only natural a contrarian reactive bear rally would occur at some stage. All the evidence i have points to a further low being made at some time in the next 4 months or so.

May 13 02:15 AM

[redrock:]

You are correct that when the contract rolls over, they sell the old one and buy the same dollar amount of the new one less fees. In a contango market, the shareholders own progressively fewer and fewer contracts each month as the contract rolls. This is not significant if you are using UNG for short term trades, but if you think that UNG will not do much over the summer season as is typical, then the roll will cost you. This is the same situation as USO, but there, you have the choice of buying USL, which owns the 12 forward monthly futures contracrs and only rolls one contract each month (or 1/12th of the portfolio) so the long term costs are less.


On May 12 04:41 PM Chris Matuszewski wrote:

> I question some of futurestrader's analysis about UNG.
>
> First of all, since it is a partnership and it passes on income and
> capital gains/losses directly to the shareholder, you would get all
> the same tax advantages as you would if you were to buy the futures
> contract. The 1256 Contract discussed is the very same 60/40 split
> mentioned for long/short term capital gains. For this reason, there
> is no need for them to issue distributions. UNG has no income revenue
> to speak of. It is all about capital appreciation of the underlying
> futures contracts.
>
> I highly doubt that an investor in UNG would lose money due to the
> fact that natural gas is in contango. It makes more sense to me that
> when rolling over to the next contract UNG would buy the same dollar
> amount worth of contracts instead of buying the same number of contracts.
>
>
> I think that for the average investor, or the small investor, it
> is better to use UNG rather than trade the futures contracts directly.
> UNG will charge a nominal fee to manage the buying and selling of
> these contracts for you. Plus, they make it easier to scale into
> and out of a position without worrying about the actual contract
> size increments. Best of all, almost every investor already has access
> to trade UNG on the NYSE.
>
> I would recommend buying UNG or the Natural Gas futures contract
> now because it is currently at a relatively low price, and we are
> seeing the beginning signs of an economic recovery. I think there
> is still risk of a prolonged recovery period, but I wouldn't want
> to miss out on this rally when it happens. Plus, the long-term demand
> for Natural Gas looks very promising.

May 14 04:33 PM

[Billy Ford:]

You can doubt my analysis all you want, but I can only speak from experience. My experience is that you WILL receive a K-1, which WILL have an income that you will have to pay taxes on (and yes you are right..it is 1256 contracts)..But I never received any income through a distribution from them..The only income I received was from buying and selling the ETF (standard ST cap gains). I called them directly and their tax people actually stated that they dont have to pay distributions if they dont want to...Do what you want, but i would only use their options to avoid the actual posession of shares...

May 15 01:21 PM

[H. T. Love:]

Since that post I've had more time to investigate, read, do more charting, etc. I'm still long-term bullish, but now short-term bearish. I posted in another comment that I got out and took profits based on the charts.

I think my first-ever article will be published next week (unsure because they mailed me that my moniker was "unprofessional". I told them I wasn't professional - we'll see).

Keeping in mind my n00bness, you might want to take a look at my thoughts here

seekingalpha.com/accou...

Be critical since I'm really new at all this. Anyway, the "raw" thoughts are in the oldest entry. The one that may be posted is near the top.

Thanks for the kind words,
HardToLove


On May 11 12:38 PM Artistes wrote:

> HartToLove:
>
> Thanks for you comments. I'm in agreement with you regarding UNG's
> recent advance and a prediction of a "small pullback" for several
> reasons. (1) the price of UNG has come down so far to the point of
> being dramatically oversold; (2) the price of gasoline has jumped
> quite a bit in the last week (at least here in Connecticut), thereby
> confirming support for oil's advancement into the high fifties (I
> know, it usually goes the other way around - oil goes up and gasoline
> goes up, especially when we are now in the summer months); (3) BO's
> clean energy thinking and resulting policy; (4); and technically,
> there are windows or gaps in the price range of UNG over the last
> few days. If those gaps hold and are not "filled in," then it will
> really confirm a true turn-around and breakout.
>
> See what happens tomorrow and Wednesday and then I'll buy in. I'm
> both a long and short trader, but of course, always looking for the
> best entry price.

Jun 05 04:24 PM