Are Oil ETFs Showing Us How Natural Gas ETFs Will Trade?

There are striking similarities between the stock charts of the US ETF for natural gas (UNG) now and where the stock chart for the US ETF for oil (USO) was in December-February.

The two charts tell us that despite all the bearish fundamentals for natural gas in North America (and there are lots!), the time to buy UNG is very near. The chart for the Canadian natural gas ETFs (GAS-TSX, HNU-TSX) tells the same story.

In February of this year, when everyone thought oil was going to stay at $40-$45 per barrel throughout 2009, the ETF for oil in the US, USO, bottomed. Its downward momentum was matched almost exactly with a rising crescendo of volume from investors. The ultimate low was still a couple weeks away, but as soon as the volume started to subside, the ETF tracked higher.

UNG and GAS-TSX are now showing signs of going through the same telltale crescendo of volume. This would indicate that investors believe the natural gas price in North America has bottomed, or is very near bottom.

There are several bullish fundamental factors for natural gas.

1) The most compelling is that the number of rigs exploring for natural gas in the US is down 50% from last year at this time, at 700. Industry analysts are predicting a sharp drop in supply resulting from this. I wrote in an earlier article that oil and gas specialist Tristone Capital out of Calgary is expecting a 7 bcf/d (billion cubic feet per day) drop in production in the US by late spring 2010. This would be a huge drop.

2) Combine this with any increase in industrial demand and the table is set for significantly higher prices.

3) An increasing number of experts are explaining how the real, all-in, cost of production, including land costs, are $7 - $9 per mcf (million cubic feet), and twice the price of natural gas right now. Investors who don’t think this can continue should remember the phrase “the markets can remain irrational longer than investors can remain solvent.”

But there are several bearish factors for natural gas prices as well.

1) New shale and tight gas plays in the US and Canada continue to prove up huge supplies of low cost natural gas, lowering the break-even price for operators.

2) The amount of gas going into storage is almost at record levels - and the rate of injection increases this year over the 5 year average is going up, i.e. demand destruction is still outpacing supply destruction - by an increasingly wide margin. Not by a narrowing margin. Yet. (This is what the bulls are waiting for - watch natural gas stocks scream upwards when that dream becomes reality. The market thought they had a sniff of that yesterday & took natgas stocks higher, even though the actual number was bearish.)

3) The fast growing, low cost Liquid Natural Gas (LNG) sector is a wildcard. It could swamp North American shores as a cheap source of supply or it may miss here completely and end up in Asia or South America.

Almost all research analysts and the talking heads on business TV say natural gas prices will continue to go down through August, and then begin to rebound. How big the rebound is, is where opinions begin to differ.

These ETFs are strange creatures in that stocks inherently track the future, they track expectations of the financial picture 6-9 months from now. Yet ETFs track indexes that are based solely on current prices. I think the only way you can see the future in an ETF is by the volume. And that’s what makes the natural gas ETFs so intriguing right now.

If and when I buy a natural gas ETF, I will buy the GAS:TSX. For my American audience, it gives you a Canadian dollar denominated security, which is good if you think the US dollar will continue lower. Second, I prefer it over the HNU:TSX ETF by Horizons Beta Pro. GAS-TSX has no leverage, and does not reset itself every day, and I believe it more accurately tracks the commodity price. Remember that GAS:TSX tracks the Canadian gas price out of Edmonton, AECO, which can be found at www.ngx.com. It does not track NYMEX.

Disclosure: I do not own any of the ETFs mentioned here.

Comments

[Gigem77:]

The U.S. is about two months away from reaching full storage for natgas. That will happen at different times in different districts. Once that happens, production must be curtailed. Curtailment will drive spot prices lower and hit the earnings of natgas producers. Spot prices in the west and mid-continent are already in the 2.50-2.75 range, intelligencepress.com/.../
There is no indication that industrial demand is increasing despite the historically low prices. Companies like CHK have already cut production by several hundred million cubic feet per day. This gas can easily be brought back to the market should demand increase and is thus an overhang weight on prices.

The rig count is misleading because the shale plays are so incredibly productive. Watch production, not the rig count.

UNG and other etfs represent speculation in futures and swaps. They do not and can not take delivery of natural gas. Thus they cannot take gas off of the market. If these vehicles diverge from the reality of the physical market, the shorts will sell them into the dirt.

Jun 14 08:57 AM

[capt Brian:]

I see lower fuel prices across the board, not touching any now.

Jun 14 11:14 AM

[Energy Trader:]

There are serious problems with UNG, that the author fails to discuss. 1) The negative effects of the roll of the contracts related to these ETFs, with the current contango in the nat gas market they will lose anywhere from 2-5% as they sell the current front month and move in the next front month as the next month's contract are more expensive. 2) UNG is the gorrilla in the nat gas market (basically they are the largest buyer by a long shot!) as such they are responsible for nat gas not trading in the $2-3 range since they are supporting the entire market with their buying. The combination of losing value due to the roll and then being the main buyer the ETF will eventually no longer be able to support the nat gas market.

Jun 14 11:40 AM

[scfranklin94:]

Thoughts on using TSX vs. UNG:
Pros
1) TSX is in CDN, which is good if you think USD is going to weaken.
2) High crude prices will get the tar sands into high gear and Alberta nat gas prices will have a floor due to NG use in the extraction.
3) AECO gas can go either east or west, unlike many other production areas.

Cons
1) If crude prices tumble, the CDN will probably weaken.
2) Canadian gas storage is already high, so the daily volume has to be burned/exported or shut-in.
3) Western US gas storage facilities are nearing 90% full, limiting AECO's deliverability to Ontario and Chicago, neither of which need much gas for the summer.

One thing to consider in playing ETFs in nat gas, is that the winter is already at $6, and the breakeven price for shale gas is below that, so it's possible that we could get to the winter, with increasing rig counts and no appreciable gain on the ETFs, since they continually roll into the next month at a higher price.

Jun 14 11:45 AM

[Gigem77:]

Here is a good read on the UNG etf with more details about what they are doing. ftalphaville.ft.com/bl.../

Jun 14 12:35 PM

[kk1:]

One wonders about the expertise of the analyst when they read, " An increasing number of experts are explaining how the real, all-in, cost of production, including land costs, are $7 - $9 per mcf (million cubic feet)...."

mcf is a thousand cubic feet
mmcf is a million

Jun 14 01:39 PM

[ECONOMICS 101:]

Gerald Chipeur of Miller Thomson is a strong advocate of fairness and believes and wants what is good for the US to be good for the Canadian people.
Currently there are no trade barriers for Nat Gas and oil and hopefully we will not see them.
Gerald Chipeur has and will continue to be a free trade advocate for the written and signed word that was signed.
Protectionism measures will hurt all.
If one signs on the dotted line then one should respect and be bound by it.
Nat Gas is and will be the cheapest form of energy around in North America. Why we don't exploit that opportunity is confusing to say the least.
The oil man extraordinaire Boone Pickens is dumbfounded why President Barrack Obama doesn't go to boonepickens.com and see how simple it would be to become independent from the Saudi's and "enemy" nations that own and control 90% of the oil that last year we spent $780,000,000,000. importing!!!
Chesapeake (CHPK) is the largest single pure Nat Gas play in the world and it is North American owned and controlled and the product is under our feet.
Gerald Chipeur says support what is fair for all and let's embrace all viable and North American owned alternative energies to foreign owned oil.
Boone Pickens agrees with Gerald Chipeur.

Let's get rid of foreign oil in the next 20 years people!!

By Johnathan Vrozos
johnathanvrozos.com
johnathanvrozos.ca

Jun 14 08:23 PM

[phubaiguy:]

We switch our cars to NG and what few allies we have in the ME fall and here comes a dozen new nuts to deal with. But what would happen if we only switched half and then imported only from allies? Bearing in mind we just killed the oil demand for years. But right here we lovers of the blue flame now have to factor in a bill just introduced in Congress to ban fracking due to ground water concerns. It would cut down on supply and add to expense and the ones trying to hurt us might be nothing short of a Godsend.

Jun 14 10:32 PM

[rick flair:]

most of the drive for oil is from your insane/sober military, which controls your country, and sees the ability of china alone to drain the oilsands in 25 years, and needs the oil desperately for its war machines. it couldn't care less about you or your electric car fantasies, or your numnutz green philosophies, AND NEVER WILL. it runs the country, and will exert EXTREME POWER towards anyone getting in its way of oil...it could not care less about natural gas .......oil will go much higher......count on it...

Jun 15 12:27 AM

[rick flair:]

theres also no way they will allow china to drain that resevoir. they'll make alberta an offer they can't refuse. and if you think they won't come and take it, your sadly mistaken...."we'll take all of it at $150 a barrel, guarenteed..."

Jun 15 12:32 AM

[22thoroughbred:]

What symbol is used for the canadian nat gas ETF, I am unable to find, OR exact name?

thanks

Jun 15 01:26 AM

[already tak...:]

GAS.TO I think.....


On Jun 15 01:26 AM 22thoroughbred wrote:

> What symbol is used for the canadian nat gas ETF, I am unable to
> find, OR exact name?
>
> thanks

Jun 15 01:42 AM

[pockyclips ...:]

Why, oh why, can't we at least convert fleet users to NG? The military industrial complex/multinational oil company already have one of our testicles in a vise. Why wait for the other?

Jun 15 08:28 AM

[Jay-Dawg, CDA:]

If you invest in a natural gas ETF in Canada or the USA has no impact. You do not get a canadian currency exposure by investing in GAS.TO, since the index it tracks (NGX Canadian Natural Gas Index) is influenced by the movement of the canadian currency vs the american dollar. If Natural gas rises by 3% and the canadian currency appreciates by 3%, GAS.TO should be more or less unchanged. You will get a 3% translation return since your holdings are in Canadian dollars, but it only compensates for the 3% underperformance of the ETF (because UNG would be UP 3%).

This is basic knowledge man, you should know this...

Jun 15 09:21 AM

[Mad Hedge F...:]

So your research first. Every evening, after the cleaning staff has swept up the discarded trade tickets from the floor, the networks have swapped relentlessly opinionated commentators for game shows, and all but the most ambitious traders have decamped for the bars across the street, I sit down and go over my portfolio, asking myself a few key questions. Have I gone completely insane? What have I missed? Are these the positions of someone who has gone completely barking Mad (oops)? Just as I was going through this exercise last night, a long time friend from the energy industry, who used to put me up in his Dallas mansion when I was wildcatting for natural gas in the Barnet Shale a decade ago, called me up and told me I was out of my tree putting people into NG at $3.60. Huge discoveries, such as the Hainesville shale in Alabama, have made available enough NG to last the US another 50 years. The new generation of fracting technology, while great for taping into marginal, low grade fields, is much more difficult to turn off when prices are low without causing permanent damage. And then there is the looming threat of large scale LNG imports from abroad. The big gas companies will be forced to dump whatever they have on the market at any price, possibly taking prices this summer down to $2, or even $1. This, after all is the mother of all overshoot contracts. Of course, one could argue that these risks are what already took it down to $3.20, and that industry demand will happily soak up the excess supply. Did I mention that the hurricane season started yesterday? Only Mr. Market knows for sure, and he ain’t talking. In the past month, my calls have enabled traders to catch a 50% move in NG, followed by a 20% move (www.madhedgefundtrader... ). No one will think less of you if you want to cash out here at $4.30 and stay on the sidelines until a more definitive bottom is put in. As they love to tell you in flight school, there are old pilots, and there are bold pilots, but there are no old, bold pilots.

Jun 15 10:30 AM

[Buck East:]

Gigem--right on, fully agree.


On Jun 14 08:57 AM Gigem77 wrote:

> The U.S. is about two months away from reaching full storage for
> natgas. That will happen at different times in different districts.
> Once that happens, production must be curtailed. Curtailment will
> drive spot prices lower and hit the earnings of natgas producers.
> Spot prices in the west and mid-continent are already in the 2.50-2.75
> range, intelligencepress.com/.../
> There is no indication that industrial demand is increasing despite
> the historically low prices. Companies like CHK have already cut
> production by several hundred million cubic feet per day. This gas
> can easily be brought back to the market should demand increase and
> is thus an overhang weight on prices.
>
> The rig count is misleading because the shale plays are so incredibly
> productive. Watch production, not the rig count.
>
> UNG and other etfs represent speculation in futures and swaps. They
> do not and can not take delivery of natural gas. Thus they cannot
> take gas off of the market. If these vehicles diverge from the
> reality of the physical market, the shorts will sell them into the
> dirt.

Jun 15 10:40 AM

[Buck East:]

This is a great observation--what if there were no ETFs? What would all commoditiy prices be like? Are etf's supporting mini-bubbles?


On Jun 14 11:40 AM energytrader wrote:

> There are serious problems with UNG, that the author fails to discuss.
> 1) The negative effects of the roll of the contracts related to these
> ETFs, with the current contango in the nat gas market they will lose
> anywhere from 2-5% as they sell the current front month and move
> in the next front month as the next month's contract are more expensive.
> 2) UNG is the gorrilla in the nat gas market (basically they are
> the largest buyer by a long shot!) as such they are responsible for
> nat gas not trading in the $2-3 range since they are supporting the
> entire market with their buying. The combination of losing value
> due to the roll and then being the main buyer the ETF will eventually
> no longer be able to support the nat gas market.

Jun 15 10:42 AM

[Buck East:]

Do you mean, "Haynesville," and "Louisiana?"


On Jun 15 10:30 AM Mad Hedge Fund Trader wrote:

> So your research first. Every evening, after the cleaning staff has
> swept up the discarded trade tickets from the floor, the networks
> have swapped relentlessly opinionated commentators for game shows,
> and all but the most ambitious traders have decamped for the bars
> across the street, I sit down and go over my portfolio, asking myself
> a few key questions. Have I gone completely insane? What have I missed?
> Are these the positions of someone who has gone completely barking
> Mad (oops)? Just as I was going through this exercise last night,
> a long time friend from the energy industry, who used to put me up
> in his Dallas mansion when I was wildcatting for natural gas in the
> Barnet Shale a decade ago, called me up and told me I was out of
> my tree putting people into NG at $3.60. Huge discoveries, such
> as the Hainesville shale in Alabama, have made available enough NG
> to last the US another 50 years. The new generation of fracting technology,
> while great for taping into marginal, low grade fields, is much more
> difficult to turn off when prices are low without causing permanent
> damage. And then there is the looming threat of large scale LNG imports
> from abroad. The big gas companies will be forced to dump whatever
> they have on the market at any price, possibly taking prices this
> summer down to $2, or even $1. This, after all is the mother of all
> overshoot contracts. Of course, one could argue that these risks
> are what already took it down to $3.20, and that industry demand
> will happily soak up the excess supply. Did I mention that the hurricane
> season started yesterday? Only Mr. Market knows for sure, and he
> ain’t talking. In the past month, my calls have enabled traders to
> catch a 50% move in NG, followed by a 20% move (www.madhedgefundtrader...
> ). No one will think less of you if you want to cash out here at
> $4.30 and stay on the sidelines until a more definitive bottom is
> put in. As they love to tell you in flight school, there are old
> pilots, and there are bold pilots, but there are no old, bold pilots.

Jun 15 10:44 AM

[Crude Oil T...:]

The swing trader still has plenty of time to get into the natural gas trade. Today is prove of that!

Jun 15 11:10 AM

[Sovestor:]

Natural Gas is mostly an American commodity, not true global commodity. Hence we do not think comparing oil chart and natural gas chart can show insightful ideas.

Jun 15 11:58 AM

[Brian McM:]

Industrial demand does not follow supply, supply follows industrial demand. Gas prices will firm when demand picks up later this year and into 2010. Drilling and Production have been curtailed the past 6-12 months, so when demand does pick up and draws down stock, it will be hard to replenish which will cause prices to increase.


On Jun 14 08:57 AM Gigem77 wrote:

> The U.S. is about two months away from reaching full storage for
> natgas. That will happen at different times in different districts.
> Once that happens, production must be curtailed. Curtailment will
> drive spot prices lower and hit the earnings of natgas producers.
> Spot prices in the west and mid-continent are already in the 2.50-2.75
> range, intelligencepress.com/.../
> There is no indication that industrial demand is increasing despite
> the historically low prices. Companies like CHK have already cut
> production by several hundred million cubic feet per day. This gas
> can easily be brought back to the market should demand increase and
> is thus an overhang weight on prices.
>
> The rig count is misleading because the shale plays are so incredibly
> productive. Watch production, not the rig count.
>
> UNG and other etfs represent speculation in futures and swaps. They
> do not and can not take delivery of natural gas. Thus they cannot
> take gas off of the market. If these vehicles diverge from the reality
> of the physical market, the shorts will sell them into the dirt.

Jun 16 12:43 AM

[Brian McM:]

Anyone trading index funds based on futures contracts (most, if not all commodity ETFs and most if not all inverse index stock funds like Proshares) should understand the problem with rolling contracts and the possible challenges faced by indexes in contango. But if used for short term trading, contango and rolling contracts do not affect performance. Commodity Index ETFs are not for buy and hold.


On Jun 14 11:40 AM energytrader wrote:

> There are serious problems with UNG, that the author fails to discuss.
> 1) The negative effects of the roll of the contracts related to these
> ETFs, with the current contango in the nat gas market they will lose
> anywhere from 2-5% as they sell the current front month and move
> in the next front month as the next month's contract are more expensive.
> 2) UNG is the gorrilla in the nat gas market (basically they are
> the largest buyer by a long shot!) as such they are responsible for
> nat gas not trading in the $2-3 range since they are supporting the
> entire market with their buying. The combination of losing value
> due to the roll and then being the main buyer the ETF will eventually
> no longer be able to support the nat gas market.

Jun 16 12:46 AM

[realold:]

The fact the Messiah is not showing interest in natural gas will tell you just how uninterested he is in American prosperity. He has his own agenda and NG interferes with it. He seeks equal misery for all and dependence on him (government) for handouts. No vote, no handout for you. It is all politics and has nothing to do with right/wrong or logic. Obviously, we should be using the heck out of NG. There is no reason for not using it, other than politics.


On Jun 14 08:23 PM Johnathan Vrozos wrote:

> Gerald Chipeur of Miller Thomson is a strong advocate of fairness
> and believes and wants what is good for the US to be good for the
> Canadian people.
> Currently there are no trade barriers for Nat Gas and oil and hopefully
> we will not see them.
> Gerald Chipeur has and will continue to be a free trade advocate
> for the written and signed word that was signed.
> Protectionism measures will hurt all.
> If one signs on the dotted line then one should respect and be bound
> by it.
> Nat Gas is and will be the cheapest form of energy around in North
> America. Why we don't exploit that opportunity is confusing to say
> the least.
> The oil man extraordinaire Boone Pickens is dumbfounded why President
> Barrack Obama doesn't go to boonepickens.com and see how simple
> it would be to become independent from the Saudi's and "enemy" nations
> that own and control 90% of the oil that last year we spent $780,000,000,000.
> importing!!!
> Chesapeake (seekingalpha.com/symbo...) is the largest single
> pure Nat Gas play in the world and it is North American owned and
> controlled and the product is under our feet.
> Gerald Chipeur says support what is fair for all and let's embrace
> all viable and North American owned alternative energies to foreign
> owned oil.
> Boone Pickens agrees with Gerald Chipeur.
>
> Let's get rid of foreign oil in the next 20 years people!!
>
> By Johnathan Vrozos
> johnathanvrozos.com
> johnathanvrozos.ca

Jul 25 11:49 PM