What's in Store for the U.S. Natural Gas Fund?

Natural gas is the one commodity that has mostly resisted the rally ushered in some three months ago by a growing consensus that the worst may be over for the economy.

A number of reasons have been put forward to explain this, including record storage levels and a growing supply base being unlocked through shale gas production in North America.

Yet natural gas's future looks bright: [a] it burns a lot cleaner than coal, making it a superior alternative to meet for base- and peakload power requirements in a carbon-constrained world; [b] it is receiving growing attention as bridge fuel between gasoline-powered internal combustion engines and electric vehicles; [c] there is ample supply of it in the U.S. and Canada, making it popular with the energy independence crowd.

The near-term picture, however, is bleak... and it could be about to get bleaker. According to analysts at Citigroup Global Markets, trading activity at the US Natural Gas Fund (UNG) may be 'artificially' propping the front-month NYMEX contract. The storage situation is apparently bleak enough to warrant yet lower prices, begging the question: when, if at all, will the chickens come home to roost?

Although the combination of a bright future and depressed prices make natural gas - through UNG - an interesting investment idea for light-green alt energy investors with a time horizon beyond 12 months, there could be further price declines on the way. Right now may yet be a little early to pull the long trigger...

DISCLOSURE: None

Comments

[stocknerd]

You must look LONG TERM at NG. If ever there was a buy....wait....wait...and then sell, it is UNG. If and when UNG drops below 52 week PPS then it is a buy signal. MY mantra is: Buy low, sell high. I believe UNG is now low. BUY. For investors who have a 6 month timeline. (6 months is long in this market, maybe a light year actually.) Luck to all, except shorters.

2009 Jul 01 09:08 AM

[Mad Hedge Fund Trader]

What will NG doe if we get a $15 pullback in crude from here? The Potential Gas Committee of the American Gas Association published a report that US reserves have jumped by 35% to 1,836 trillion cubic feet, thanks to the huge discoveries of new shale fields since 2006. Also contributing are the new fracturing technologies, which I had a hand in pioneering myself ten years ago. That means our natural gas reserves can now meet 100 years of current consumption, and are roughly equivalent to Saudi Arabia’s crude reserves on a BTU basis. Natural gas futures dove 26 cents to $4.23, and the ETF (UNG) gave back 4%. A buddy of mine close to the committee warned me that something like this was headed down the pike, which is why I sent readers a warning two weeks ago to cash out at $4.30 (see www.madhedgefundtrader...). When you only see chart driven traders buying a commodity and the industry insiders selling the Hell out of it, you want to stay away. Bewildered technicians were last seen feverishly searching for Hainesville on Google. It was their models that sucked $3 billion into UNG over the last three months. This is great news for the big consumers of NG, like the utility industry and the petrochemical industry. It will also give a shot in the arm to Boone Pickens’ plan to shift our transportation system to NG (see www.madhedgefundtrader...). Even the ratio, pairs, and mean reversion traders have been burned by NG this year. As cheap as NG is, a Saudi Arabia’s worth of supply hitting the market could easily knock the price down by half from here. As extreme as the move in the oil/gas ratio is at 18:1, we could be breaking new ground.

2009 Jul 01 10:17 AM

[Larry House]

Natural gas is here, it is abundant, it is cheap. Something must change in the supply/demand equation to yield higher prices. I think that will come, but it probably won't be soon. Personally, I would rather own COP, which has huge exposure to natural gas (and oil, of course) and pays a nice dividend. I think it would be hard to find a better natural gas/oil play than COP. (I do not now own COP.)

2009 Jul 01 05:19 PM

[H. T. Love]

On Jul 01 05:19 PM Larry House wrote:

> Natural gas is here, it is abundant, it is cheap. Something must
> change in the supply/demand equation to yield higher prices. I think
> that will come, but it probably won't be soon.

Disclosure: no position in any energy stock at this time.

WARNING RANT AHEAD - RANDOM DISJOINTEDNESS LIKELY

Alternately, if our U.S. House of Clowns passed any kind of a rational "clean energy" bill, they could have paid attention to the known physics/economics/time... of wind/solar/geothermal/HEV and *at_least* consider the transitional benefits of NG (environmental and economic) for transportation and other uses until the benefits of their policies produce the anticipated nirvana.

But noooooo! They allow Alaska to dip into the public coffers for a low-cost loan to build a pipeline to the lower 48 to increase the supply. I guess they realize that a shortage is rapidly developing and the 100 year (already known) supply we purportedly have in the lower 48 states is obviously insufficient.

There goes your higher NG prices! And probably a lot of good promising companies in a couple more years.

I don't know about you, but I smell a "payoff" to buy the votes they needed. Hm, I wonder who benefits from this little boondoggle. Can't be Stevens, he's been deposed already.

> Personally, I would
> rather own COP, which has huge exposure to natural gas (and oil,
> of course) and pays a nice dividend. I think it would be hard to
> find a better natural gas/oil play than COP. (I do not now own COP.)

That may not work out either. Another great move they made, probably just because they dislike any sensible plan proposed by some "Ignorant Texas Oil Baron" that keeps $700B/year here instead of sending it overseas, is to *reduce* the tax incentives for the oil and gas companies (based on all the news reports I was able to locate the day after it cleared the house). I guess the intent is to reduce the urge to locate and develop domestic resources, for even a transitional plan, by decreasing realized profits unless prices are raised enough to compensate. I guess this fits neatly with the pipeline from Alaska - lets make sure we don't find more here so we can justify the need for that Alaska pipeline (my opinion of one possible reason). A nice side benefit is they raise gasoline prices without overtly enacting a national tax hike. That fits right in with the fanatic's master plan of making it more expensive for those that depend on *existing* resources.

Oh! Energy costs (fuel, home heating oil and natural gas, ...) for the consumer (read: U. S. citizen - taxpayers) rise? Gee that's what it costs *you* to support *our* zealotry and hubris and elitest view that we know what's best for *you*. Toooooo bad you're not smart enough to know it too!

Hm, I wonder how much that pipeline will cost? Oh well, it doesn't matter in the current environment. We don't need the resources it will consume for anything more innovative, economically beneficial, taxpayer friendly, consumer beneficial, ..., helping to revive an ailing economy. "Our goals will be accomplished, we hope you'll survive (but don't really care about that)" os my opinion based on "hot air is cheap" and "actions speak louder than words".

Are they done with us yet? ARE YOU OUT OF YOUR FREAKIN' MIND?

They do a "cap and trade" that not only increases costs to U.S. manufacturing, reducing competitiveness with overseas firms, but they structure it so that they *minimize* the benefits the taxpayer might reap:

seekingalpha.com/artic... and seekingalpha.com/artic....

I guess the intent here is to create more jobs ... OVERSEAS! Let's see, 7MM unemployed now (if I recall correctly), another few million and we have the populace completely dependent on government largess. Nothing like having your victims by the short hairs now, is there?

Beyond the elimination of tax breaks, they make it harder to get the investment needed to drill and develop domestic energy sources: seekingalpha.com/artic....

Well, rant over! Sorry 'bout that!

HardToLove

2009 Jul 01 07:03 PM

[H. T. Love]

'Although the combination of a bright future and depressed prices make natural gas - through UNG - an interesting investment idea for light-green alt energy investors with a time horizon beyond 12 months, there could be further price declines on the way. Right now may yet be a little early to pull the long trigger..."

UNG is a nad investment vehicle, for reasnons detailed in many other posts and comments on SA. Further, it future is dimmed by this filing

www.sec.gov/Archives/e...

which requests establishment of a 12-month futures contract equivalent.

When/if it is established, it should provide a much better investment vehicle.

I wouldn't *invest* in UNG here. I will trade it. It is about to break below the $13.50 support I think (good volume on falling daily closing prices), and somewhere near the high $12 range it *might* show the technicals for a trade to the upside.

I think the next EIA report will probably provide the catalyst, unless there was a *big* reduction in operating wells and injections.

HardToLove

2009 Jul 01 07:25 PM

[SCN4]

As an energy broker who studies natural gas daily, and have done so for many years, I have to say I like UNG at this level. Bottom line is that this oversupply will work itself out, and all it takes is a few days of talk about "green shoots" to send natural gas up 10% or more in the course of a day.

I am an electricity broker and study natural gas on a daily basis for a living. I bought 15000 shares of UNG at average price of 13.48 last week. I am highly confident that a swing back up to at least 14.50 is inevitable. Just look at daily volatility over the past few months. Even if it just trades in this range for a while, I feel very good right now.

We have NEVER gone through a summer without a couple pops, and I see no reason not to assume a couple this summer / hurricane season. The upside potential far outweighs the potential downside at these levels. Buy when the pundits are all bearish. Almost all new generation planned in this country is natural gas fired, and the producers are throttling back production in a massive way. The pendulum will swing back the other way and that is a fact. Take a look at the historical chart over the past 8 years, and you will this pattern. I don't care how much new gas is being produced in the shale plays. The depletion rate is massive on these new wells, and the masters of the natural gas universe are not stupid. They are hitting the breaks right now, and it will not take long before we will see this equilibrium restore itself. Natural gas anywhere under $3.75 presents one of the best investing opportunities in the market. UNG is not a great vehicle for long term investing as long as we are in contango, but it is an excellent vehicle to catch these 10-20% pops on short term trades.

I guess we will see if I am right in the next two weeks.

2009 Jul 04 06:48 PM