Natural Gas ETF (UNG) Activity Catching Up to Oil (USO)

While you wouldn't expect it from the price of natural gas, trading in the natural gas ETF (UNG) has recently become extremely active. For much of the last few years, investors who wanted exposure to energy related commodities bought USO. Over the last several weeks, however, investors have been increasingly flocking to natural gas. Over the last 50 trading days, the total dollar value of trading in UNG has risen to 77% of the dollar volume in USO, and it is up over 900% from levels we saw in March (7.6%). For all the new buyers of UNG, if only the price of natural gas could follow suit.

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Comments

[Ken Fischer:]

I tuned in to CNBC just as Jon Najarian was finishing a comment about UNG's strong upmove to day. If I heard him right there is some technical reason for the strong move and that it will end June 17th. He made it sound as certain as death and taxes. Did anyone else hear what he said? If so, please enlighten me.

Ken Fischer

Jun 11 05:53 PM

[H. T. Love:]

On Jun 11 12:57 PM buyforeclosures wrote:

> Buy under 14 and cost average...today we have a spike to near 15
> (14.80 )
>
> could force another squeeze ....

I can't speak to the validity of this, but I found this today.

shortsqueeze.com/short...

If I read it right, it seems that short interest is relatively low, only .01 days to cover.

But I'm relatively new, so, well you know.

HardToLove

Jun 11 06:31 PM

[H. T. Love:]

I didn't hear that - was focused elsewhere. But he's one of the principals at optionsmonster.com. Maybe his comments are there. I expect that they notify their subscribers first, hit the TV and then (if we're lucky) post something there?

Worth a quick try?

HardToLove


On Jun 11 05:53 PM Ken Fischer wrote:

> I tuned in to CNBC just as Jon Najarian was finishing a comment about
> UNG's strong upmove to day. If I heard him right there is some technical
> reason for the strong move and that it will end June 17th. He made
> it sound as certain as death and taxes. Did anyone else hear what
> he said? If so, please enlighten me.
>
> Ken Fischer

Jun 11 06:35 PM

[H. T. Love:]

That should be .1 days to cover.

HTL

Jun 11 06:44 PM

[Infinitus:]

www.cxoadvisory.com/bl.../

In the above link you will find a graph showing oil/natgas ratio from January 1976 through April 2008 (388 months). It is very volatile and moves most often between 5 and 10. Maybe someone can provide the raw data for further analysis.

At the following link you can see the actual ratio and back to 2006

stockcharts.com/charts...

Today we have a ratio of 19.4 which calls for rising Natgas prices or declining oil prices.



On Jun 11 03:52 PM HardToLove wrote:


> Question: I've been using 18:1, which I've seen used many times.
> Which is correct? (Context is that Peter Beutel used 8.5:1 in that
> CNBC commentary my blog references).
>
> Here cxoadvisory.com/blog/i.../ one poster
> was using 6:1. The responder used the energy content method.
>
> Here seekingalpha.com/artic... it says the normal is 10:1. I've also
> seen 14:1. But it seems that the 18:1 I've been using is a near-term
> phenomenon. Maybe it is now valid because of the over-supply of NG
> and the perceived shortage of oil?

Jun 11 08:13 PM

[Dawgtrader:]

Najarian was referring to the rollover of the NG contracts, which occur during those dates. You can find this info on the UNG website. According to him, this rollover should have significant pressure on the price.

Dawgtrader


On Jun 11 05:53 PM Ken Fischer wrote:

> I tuned in to CNBC just as Jon Najarian was finishing a comment about
> UNG's strong upmove to day. If I heard him right there is some technical
> reason for the strong move and that it will end June 17th. He made
> it sound as certain as death and taxes. Did anyone else hear what
> he said? If so, please enlighten me.
>
> Ken Fischer

Jun 11 10:54 PM

[freefall51:]

The rollover will cost UNG money, since the Aug and later contracts are more expensive thant the expiring July contract. To make the roll over an argument for the price spike today is counter intuitive.
But then again. Had I always done the opposite of what I found intuitive in the market I would be filthy rich by now and retired.

Jun 12 01:33 AM

[Audio Tactics:]

Does anybody have any insight on the USO futures roll?

When will it happen (I know its over a 4 day period but couldn't find the details on USO site)?

And how does it usually affect the USO price all other things held equal?

thx.

Jun 12 02:53 AM

[H. T. Love:]

On Jun 11 08:13 PM Infinitus wrote:

> www.cxoadvisory.com/bl.../
>
> In the above link you will find a graph showing oil/natgas ratio
> from January 1976 through April 2008 (388 months). It is very volatile
> and moves most often between 5 and 10. Maybe someone can provide
> the raw data for further analysis.

Thanks for taking the time. I had visited that one and seen that. And now it even shows into June of this year. I didn't think I would be safe using that because of the change in the environment - supply/demand on NG having changed, oil being handled the way it is (as a speculation by the "biggies"), demand for both NG and oil being down (at least for now - although driving is up a little seasonally) and refinery utilization being very low, etc.

>
> At the following link you can see the actual ratio and back to 2006
>
>
> stockcharts.com/charts...;br/>

Hadn't checked that one. Thanks.

>
> Today we have a ratio of 19.4 which calls for rising Natgas prices
> or declining oil prices.

Yep. Two days ago (?) it was right at 18 and I did the same calc yesterday and got what you did.

My concern is that with the "new reality", all previous "norms" seem to be, at a minimum, in doubt.

Since I'm viewing NG, near-term, as not investable but as a trade (just can't get long-term serious about it until we don't see UNG - using it as a proxy right now - volumes like yesterday's - 94.05MM shares, the highest on my 200 day chart, and multiple intra-day very large 1 minute volume spikes of 1.4MM-2.44MM shares)

That chart on the first link you gave seems to be about 12.5:1 for now (June) and obviously will need updating. Like you, I think either oil or gas needs to adjust. With supply/demand for NG right now, I know it'll have to be oil unless the sell-side folks are successful in convincing folks that now is the time for long-term entry into NG.

I guess for near-term I'll stick with 18:1 (should float around there until JPM, GS, et all get their speculative profit out of the boatloads of futures and oil - literally) since I see it for now as only a trade.

Again, thanks
HardToLove

Jun 12 05:53 AM

[H. T. Love:]

On Jun 12 01:33 AM freefall51 wrote:

> The rollover will cost UNG money, since the Aug and later contracts
> are more expensive thant the expiring July contract. To make the
> roll over an argument for the price spike today is counter intuitive.

That spike fits into the pattern we've been seeing for awhile now. I recently started folloing UNG and found out that I could use the blogging facility to keep my nots and stuff.

In my raw comments entry here,

seekingalpha.com/insta...

are some thoughts, charts, etc. Jump right to near the end and you'll see a chart for 200 days.

> <snip>

HardToLove

Jun 12 06:00 AM

[H. T. Love:]

freefall51,

I forgot to mention - click on the charts and they'll "blow up" so you can actually read them. Another click will shrink it back down.

HardToLove

Jun 12 06:04 AM

[christophe:]

HardToLove you should make relatively small blog entries. With each entry trying to make one main point.

Everyday or even multiple times a day, when you want to share some idea, make a new entry.

good luck...

Jun 12 06:43 AM

[Plan B Econ...:]

Interesting. Here's a link to the a chart showing the ratio of oil price-to-natural gas price.

www.planbeconomics.com.../

True, natural gas prices are low (below cost of production) because inventories are very high. But drilling is down and will weaker production will eventually clear inventories.

Also, natural gas is sort of like a long-term, out of the money call option on oil. Once oil prices rise enough to ramp up oilsands production the price of natural gas will rise. Lots of natural gas is needed to mine the oilsands.

Moreover, once oil prices rise enough natural gas will likely be used as a substitute where it can.

Jun 12 07:30 AM

[DHH:]

what do you guys think of epex? they're a natural gas producer in the US

Jun 12 10:08 AM

[Fulcanelli:]

The last 7 or 8 years---I think the pattern has been to run up NG prior to 7/4 as a summer+hurricane play. Then after the holiday---its a sell-a-thon until there is a major heat or hurricane threat. I would tend to close out/hedge or possibly short NG towards the end of June based on my past experience. Also--sun activity is at a mysterious lower right now-we should be entering a solar max period through 2012. Look for a cooler summer, minimal hurricane threats and a below normal winter until this most important factor reverses. (and of course there are other factors to keep an eye on as well that could thwart such patterns such as political and inflationary variables.)

Jun 12 12:01 PM

[Shimmers:]

both of these investments seem ineffective to me. for the next 4 bus days as the june contracts expire ung buys the July contracts. so they will own a lot less gas in 4 days than today as the july gas is much more expensive. essentially it is a bet on the July contracts increasing over the next month from current levels (not from levels a month ago when i invested). it seems to be less effective given the steepness of the strip pricing curve. thoughts? if you look at uso's performance vs oil it is clear how these things work (not well).

Jun 12 01:05 PM

[MadScientist:]

The price-volume action on this recently has been interesting:

After two weeks of brutal declines UNG ends the day on 21 May at $14.21. On 22 May UNG opens 3.5% lower at $13.70 - over 30 million shares are traded - and UNG closes at $13.70. With that much volume, why didn't the price drop intraday? Professional money has moved in and absorbed the supply at a discount.

The next two days see another 60 million shares trade hands, and the net change in UNG price is only 2 cents (closes on 27 May at $13.72). Again, big money is buying these shares at a great price.

Now the suckers move in - on 11 June over 95 million shares are sold pushing the price up to $14.80. Do you think the smart money is buying these shares right now? No - they got in earlier, at a better price, and are now poised to begin distributing their shares over the next few days without moving the price too much. Then - drop city. Probably coordinated with the contract roll-over, which many shareholders will be unaware of until after it hits them.

Jun 13 01:59 PM

[AndrewBaker:]

On the energy generated, oil to natural gas (NG) is 6:1, and the prices should reflect this, there or thereabouts, as they have done historically. Right now the ratio is nearer 18:1. So, either oil falls steeply or NG rises. Even if oil falls a little, NG still has to rise to track back to its long-term ratio with oil.

Several factors have caused the distortion, but going forward, NG will come back into favour, not least because it is a cleaner fuel and that in itself will make it politically popular: if politicians can ramp up bank prices, as they have, NG will be a cinch!

Jun 13 03:49 PM

[The-Stock-M...:]

If you look at the 3-month chart of UNG, it has been cyclical, with lower highs being set each time. We are in another upswing now, with highs probably capping at 15 - 15.5 range. There is not much increase in fundamental demand for natural gas. Heating season is months away, clean energy is still in paper. One of those speculative runs where you make money if you are lucky. At this price, the risk-reward gravitates more towards risk rather than reward. However, if you are willing to dollar cost average towards the down side, you could still make money on the next speculative upswing. Hence, if you are a short term trader, its important to not put all your money in at once into UNG, just based on technicals.

Jun 13 03:58 PM

[JimmyUSA:]

klam, maybe better if you format or categorize your linked articles in more organized way. You have interesting articles but check out other financial websites in fine tuning the 'appearance.' Hope this suggestion helps.

Jun 14 03:30 AM