Is UNG Propping Up Natural Gas Prices?

By Murray Coleman

Is the booming popularity of an exchange-traded fund altering pricing for the entire natural gas market?

That’s the possible takeaway from a new Citigroup research report. It points to a huge jump in assets by the United States Natural Gas ETF (NYSE: UNG). The firm now estimates that UNG accounts for “roughly one-quarter to one-third of NYMEX and ICE open interest natural gas contracts.”

Pretty heady stuff. And it’s not a new concern. In researching my recent IndexUniverse.com feature, “A Tale Of Two Funds,” I came across several warnings that UNG’s bulging coffers could create real demand problems for natural gas as a whole.

Give the group at Citi credit. They’ve put together perhaps the hardest numbers yet to verify this possible phenomenon. Specifically, they note that oversupply in the industry hasn’t impacted front-month contracts. (Those are the types of futures contracts that UNG invests new money into, at least initially, before rolling over expired contracts to the next month’s contracts.)

So why are natural gas prices on the front-end holding up so well? “The answer in our opinion is that investors, in focusing on long-term fundamentals that could be materially better than the near term, might be investing in UNG – which props up the front month,” the Citi team of analysts wrote. “We suspect institutional investors may be using UNG as a vehicle to gain direct exposure to natural gas prices, without the hassle of rolling forward contract positions at the end of each month.”

The implications to individual investors, of course, could be rather ominous. If big players are simply seeing UNG as a quick-and-easy solution to taking advantage of short-term pricing fluctuations as a trading tool, then small-time investors could get buried if they’re not careful.

But a more likely scenario is that institutions are making a deep value bet. It’s highly likely they’re indeed viewing UNG as an easier way to tap into natural gas as a commodities play. Still, that’s not necessarily a bad development. It’s actually probably pretty smart on the part of big-time investment houses, both in terms of time and cost savings.

For their part, the Citi analysts don’t try to come up with any conclusions about institutions’ motivations. It does note, however, that “these investors may be holding onto UNG as a way of eventually tracking to the higher prices reflected in the back end of the natural gas curve in spite of roll drag.”

The views of John Hyland, the manager of UNG, are expressed in the research piece. He points out that UNG hasn’t always shown tight correlations to prices of front-month contracts. In fact, Hyland argues that might be happening right now. But he didn’t totally dismiss charges that increased buying of UNG shares might be incrementally propping up natural gas prices, according to the report.

In any case, as the Citi team points out, more than $3 billion has flowed recently into front-month natural gas deals. “Moreover, UNG has steadily comprised a greater proportion of NYMEX open front month and front month +1 contracts,” the report stated.

Original post

Comments

[ETF Grind:]

It seems unlikely that big institutional investors would save very much investing though the ETF rather than trading the futures directly. Especially considering the potential for UNG to underperform the spot price.

Something else must be going on here...

Jun 26 04:20 AM

[AndrewBaker:]

For reasons written about in more detail elsewhere on the site, I'm long natural gas. In brief, it's plentiful, offers price savings over other fuels where there is competition, has many uses in both summer and winter, is considered "green" so politically popular, and current prices suggest much more upside than downside potential on price. The surge in recent interest is also encouraging, as unless one feels that investors are not very savvy, whatever the reason, lots of money invested is a portent of more money to be made in the future.

Jun 26 11:00 AM

[Energy Trader:]

YES, UNG is propping up the front of the nat gas market. There is no question about it.

I agree with ETF Grind, I don't think institutional traders and the like are buying into this, rather it is more likely to be the unsophisticated investor without other options to bet on nat gas prices.

Jun 26 11:19 AM

[H. T. Love:]

That was also my feeling. But being a n00b, I was at first loathe to voicing my concerns. But after some investigation, further learning and thought, I decided to post my very first article.

I would love to have the comments of more experienced and knowledgeable folks as I have to begin doing my "Bull Case" next.

Any constructive comments, links, additional resources, etc. you might offer will be appreciated.

seekingalpha.com/artic...

Thanks,
HardToLove


On Jun 26 11:19 AM Energy Trader wrote:

> <snip>
> I agree with ETF Grind, I don't think institutional traders and the
> like are buying into this, rather it is more likely to be the unsophisticated
> investor without other options to bet on nat gas prices.

Jun 26 12:33 PM

[Keelo:]

Hi mate can you give me the name and release date of the CG report pls

Jun 29 12:46 AM