Shouldn't the Natural Gas Commodity ETF Catch Up to Its Company Cousin?

World events appear to be falling in line for natural gas. It's a clean energy alternative in an era where "Government Motors" is being asked to think efficient. It's a commodity that most countries value immensely. It could serve as yet another hedge against dollar devaluation. And, it tends to take off when oil gets too big for its britches.

Yet, no commodity ETF has been more disappointing in 2009. With the Powershares DB Agriculture Fund (DBA) up 7% YTD, PowerShares Precious Metals (DBP) up 12%, Base Metals (DBB) up 27% and gasoline in the United State Gasoline Fund (USO) up a startling 70%, could anyone have expected United States Natural Gas (UNG) to post -37% loss YTD?

Perhaps the more intriguing story, however, is the collective performance of the companies in the First Trust Natural Gas Fund (FCG). Ultra-compelling valuations on beaten down nat gas producers/explorers have helped to push FCG 24% higher in 2009.

The short-term pattern hardly makes sense in the context of the bigger picture. For example, take the last year of the commodity bubble, just before the bust. The First Trust Natural Gas Fund (FCG) and the United States Natural Gas (UNG) moved in tandem.

It follows that there are only a few conclusions that one might draw. Natural gas, via the commodity ETF (UNG), will eventually garner interest. UNG did rise 11% in May. What's more, the crude oil/natural gas ratio is higher than it's been since 1991.

Either that... or the companies that generate most of their revenue from natural gas exploration/production will fall flat. And that's putting it nicely. If natural gas doesn't see a substantial pick-up in demand, FCG would likely find itself flat-out falling.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[Shale Gas:]

What if the ratio between oil and gas corrects the other way - with oil coming down in price?

Jun 09 08:37 AM

[Mike T:]

Past performance does not guarantee future results. The US is bursting with NG supply that is well above the 5-yr average. The only forces that can goose prices are a major Gulf hurricane or serious pickup in industrial demand. Everybody ASSUMES that the price just has to rise because it rose in the past. The missing point is the fundamental supply/demand balance. There is no increased demand. Oil is not gas...oil is not gas...oil is not gas...66% of one commodity comes from overseas while the other is nearly all domestic.

Jun 09 08:49 AM

[prairiedog555:]

When I look at tracking ETF's it would seem that if one picked 2 or 3 of the industry leaders one could do better and usually collect a better dividend.
Look at the 1and 2yr charts for FCG vs EOG and ECA.
And of course you save the fees.

Jun 09 09:10 AM

[retring inv...:]

There was an article in the National Post (Canadian newspaper) based on a speech from one gas company executive, suggesting that low gas prices are here to stay. There is a copy here :
www.anticorruption.ca/...

(Why in the AntiCorruption site is beyond me, but that is where I found it).

He didn't appear to quantify "low gas prices" but the message I get is that gas will not likely, in the next few years, return to a historical ratio to oil prices, unless oil comes down. Whether there will be some "bounce" or recovery from current prices, and how big that might be, is beyond my forecasting skills.

Jun 09 09:12 AM

[buyforeclos...:]

difference is NG is not crude and with new drilling tech the supply is HUGE...NG reserves will double in 5 years

Jun 09 10:54 AM

[buyforeclos...:]

That being said UNG under 14 is a good place to start to cost average...I am in at 13.80 and will cost average in the 12's ( should it get there and it could retest 12.69 lows but wouldn't bet on it ) with larger block purchases. 3 total In the winter I expect NG to be in high 4's low 5's but purely speculation at this point....a couple big hurricanes would help

Jun 09 10:56 AM

[tc1:]

Thank you, Gary, for a new angle on the nat gas investment topic.

A few points on supply-demand, supplementing what some posters have written here:

1) intensifying climate change is considered the main factor for the trend of hotter summers and colder winters in many parts of the country (and, of course, warmer winters in some places, too). Climate change is also predicted (and there's evidence already) to result in more and more SUPER-HURRICANES-- a big disruptor of NG production/distribution.

2) i'm hearing from various sources that the production of nat gas from shale sources has a much steeper drop-off period than previously anticipated, so the wells won't be producing for too long-- so investing in nat gas looks good for the long term, if not the short term.

3) there's plenty of resistance from environmental advocates against current and further shale drilling because of intensive water usage by the ng industry and not insignificant water pollution, and there's a move in congress to block further shale drilling

4) there won't be much new shale drilling anyway if NG prices aren't high enough to support the venture

5) on the demand side, though Obama and his team have not yet publicly talked about it, there's a behind-the-scenes lobbying movement, endorsed even by Greenpeace, to convert coal-fired plants to gas-fired as a crucial "interrim" measure for the USA's electricity needs before wind, solar, geothermal, hydro-, and wave-power sources can more fully come online.

All of this bodes well for investors in Nat Gas-related positions.

Jun 09 12:28 PM

[tc1:]

I'm also intrigued by the following tidbit from this source:

Oil&Gas Journal
www.ogj.com/index/arti...

Energy Solutions Inc., Verona, Wis., advisor to gas purchasers, said May 13, [2009] "The perception of a recovering economy, along with rising crude oil prices, have also provided support for natural gas prices. The value of the US dollar recently hit a 4-month low, and that has been a contributing factor to stronger crude oil prices. Weakness in the dollar, which is expected to last into late June, has trumped the fact that US crude oil inventories have reached 19-year highs, and there is an estimated 100 million bbl of crude oil being stored at sea on tankers. There is nothing bullish about crude oil fundamentals."

Company analysts reported, "Right now, fundamentals don't matter—particularly for natural gas prices. In just 1 week, the front-month natural gas NYMEX futures contract rallied by more than $1/MMbtu, surpassing a number of technical resistance price levels. The June natural gas NYMEX contract is now trading at a price level comparable to where it traded in the second half of March. We believe the primary culprit for the recent price rise in natural gas is a combination of short-covering by speculators and a surge in the purchase of shares of [Denver-based] United States Natural Gas Fund LP (UNG), an exchange-traded fund, which is designed to track in percentage terms the movements of natural gas prices."

Energy Solutions said, "When money is invested into UNG, IT INITIATES THE PURCHASE OF THE UNDERLYING PORTFOLIO OF PRODUCTS (i.e. the purchase of natural gas futures contracts). IF THIS BUYING IS AGGRESSIVE, NATURAL GAS PRICES WILL RISE QUICKLY." [Emphasis added in CAPITALS.]

This looks to me like a "virtuous investment cycle" or "self-fulfilling prophecy": When lots of folks buy UNG because gas looks underpriced, then such purchases of UNG drive up the price of nat gas! Yes, speculators AND INVESTORS can do quite a lot to change the price of a commodity...

Jun 09 12:40 PM

[Shimmers:]

how does contango impact UNG's returns? What day does it roll forward the near-term contract? Isn't the shape of the curve more important than the price-level? Thanks.

Jun 09 12:50 PM

[22thoroughbred:]

While I appreciate your theory, what is your conclusion and why?

Jun 09 01:58 PM

[dieuwer:]

It seems most producers have hedge natural gas (NG) prices at around $7. Regardless what the current price of NG is doing, they will be making money. You have to wonder who is taking the huge losses: some hedge fund? Commodity traders?
When the hedges run out, producers will find themselves in a loss making situation. Then, they must cut production like there is no tomorrow. The rig count will crash and NOT ONE RIG will be in operation. The result: a HUGE price spike.

Jun 10 01:05 PM

[dieuwer:]

Rig closures due to too low natural gas prices: durangoherald.com/sect.../

Jun 10 01:21 PM