UNG Stops Issuing New Shares, Now Trading at a Premium

By Patrick Watson

The $3.7 billion U.S. Natural Gas Fund (UNG) had to stop issuing new shares earlier this week due to a regulatory snafu. Unfortunately, the fund may be caught in a controversy that is not of its own making.

Like other ETFs, the normal practice is for UNG to issue and redeem shares in order to keep the fund’s trading price aligned with the underlying asset value – in this case natural gas. The SEC authorizes securities issuers to sell shares in predefined quantities. Getting permission to issue new shares is a routine process but can take some time. UNG appears to have been caught off guard by a sudden increase in demand; the fund’s request to sell more shares is still pending.

Another issue is that the Commodity Futures Trading Commission is considering a plan to limit speculation in energy markets. Some people think commodity-based ETFs are creating harmful distortions in certain tangible commodities because they are so easily traded. This may or may not be true, but the prospect of new regulations is also potentially problematic for UNG and similar products. The CFTC review may be causing the SEC to delay action on the UNG request to offer additional shares.

In any case, the upshot of this situation is that the trading price of UNG is likely to deviate from the natural gas market until such time as UNG is able to issue new shares. Today, it is trading at nearly a 2% premium to its indicative value. In effect, UNG is now operating almost like a closed-end fund with a fixed number of shares. Investors should trade with caution – remember what happened when GOE stopped issuing shares.

Disclosure: No position

Comments

[Windsun33:]

NG is falling like a rock (my UNG is down 14% just in the past week), yet demand for the ETF outstrips supply?

Weird...

Jul 10 12:42 PM

[Chris Petrescu:]

Couple of possibilities i think:
1) Bunch of speculators/institutions trying to pick it up for clients trying to bottomfeed. Nobody wants to tell their client "sorry we cant find those shares for you."
2) Does UNG know if the increased demand is purely on the long side or the short side? I don't know the answer to this myself, but it'd be interesting if institutions wanted them to issue more shares just so they could knock down the hell out of it.

I was long for a little bit a month or so ago...but after the funds coming into UNG skyrocketed at the end of April, and with the continuing talk of how UNG is so bloated that it accounts for 85% of the NYMEX futures OUT there, not to mention that the SEC is gaining wind of how these guys move the markets drastically, i just dont like it
I mean you look at the chart and you say "no seriously, its going to put in a floor here, no here, no here, maybe i can get a short term pop." I think this is going to stay in a trading range and best if it doesn't drop like a rock when the gov't cracks down.

thoughts?

Jul 10 01:23 PM

[Ron Rowland:]

My guess is that most people buying today do not know that they are paying a 2% premium for UNG and that they get buy GAZ at NAV (or maybe a few pennies more).

Worse yet, maybe they think buying UNG at a premium is a better deal than buying GAZ because its trading price is more than $2 below that of GAZ.

If the premium on UNG continues to build, then shorting UNG and going long GAZ should be a low risk trade, assuming you can hang on long enough if UNG price becomes totally irrational, ala GOE.

Jul 10 02:30 PM

[Mad Hedge F...:]

This is a broken market. When I put out my sell recommendation on natural gas at $4.30, (SEE www.madhedgefundtrader...) the virtual trucks backed up to dump abuse on me from technical analysts, day traders, and wanabe pundits who were convinced that CH4 was the buy of the century. I also received a ton of emails from geologists, wildcatters, and gas men from all over the country with stories of even more, vast, unreported, shale discoveries. One in British Columbia I didn’t even know about. When it comes on betting my own money, I much prefer to back engineers who spend countless hours driving pickups down dusty, potholed, washboard roads to get their data, than the online dilatants, any day of the week. Best to watch the pain in the natural gas space from afar.

Jul 10 02:31 PM

[H. T. Love:]

shortsqueeze.com/?symb...

0.1 days to cover, 7.83M shorted.

HardToLove


On Jul 10 01:23 PM Chris Petrescu wrote:

> Couple of possibilities i think:
> 1) Bunch of speculators/institutions trying to pick it up for clients
> trying to bottomfeed. Nobody wants to tell their client "sorry we
> cant find those shares for you."
> 2) Does UNG know if the increased demand is purely on the long side
> or the short side? I don't know the answer to this myself, but it'd
> be interesting if institutions wanted them to issue more shares just
> so they could knock down the hell out of it.
>
> I was long for a little bit a month or so ago...but after the funds
> coming into UNG skyrocketed at the end of April, and with the continuing
> talk of how UNG is so bloated that it accounts for 85% of the NYMEX
> futures OUT there, not to mention that the SEC is gaining wind of
> how these guys move the markets drastically, i just dont like it
>
> I mean you look at the chart and you say "no seriously, its going
> to put in a floor here, no here, no here, maybe i can get a short
> term pop." I think this is going to stay in a trading range and
> best if it doesn't drop like a rock when the gov't cracks down.<br/>
>
> thoughts?

Jul 10 02:53 PM

[JD*:]

I have lost more money in UNG than any stock I have owned in 50 years. This is how I did it.

When the trend started to break at at 62, I sold half my position. Right. I can get out when there is a bounce, they said. Never a bounce did we see. So much for that theory.

Has anyone looked at the chart?

Anyone who writes anything about UNG, including me should take a long walk on a short pier.

Jul 10 10:45 PM

[Windsun33:]

I have not lost much in UNG, I have a small position, only about 2% of my total portfolio. But having bought it near the 52 week low I did not figure on as much downside as what actually happened.

Jul 11 11:07 AM

[juangalt:]

I've been trading natural gas exclusively for 20 years - I have one question for the "pundits" - with huge supply coming online daily, LNG coming onshore because we have the only global infrastructure that can handle it, storage is rapidly approaching 'full' - where is the incremental demand going to come from?

the underlying fundamentals remain horrible. still a short on my book (for at least another couple months).

good luck to all.

Jul 11 03:30 PM

[yellowhoard:]

Buying UNG several weeks ago is, by far, the worst trade that I've made in years.

That said, I think that everyone who has been burned by gas is waiting for a clear break from the downtrend.

When this puppy makes a clear breakout I think the buying will be furious.

I'm going to leave the first 20% of gains to someone smarter than me and pile back in when I see upside momentum again.

Jul 12 11:10 AM

[MarvinMBA:]

I thing this is the bottom for USG. I just bought some and have a gain already.....MarvinMBA

Aug 03 05:56 PM

[econjunkie:]

Does anybody think Mad H. is a fraud w.r.t to the claims he has made about his life in his bio? Apparently he set up the world's first dedicated international hedge fund.

Aug 18 02:21 PM

[cbp:]

Anyone concerned that the premium is now over 16.5% for UNG?

Aug 28 08:01 AM

[Danny Devito:]

20,5 % to seen and something more.


On Aug 28 08:01 AM cbp wrote:

> Anyone concerned that the premium is now over 16.5% for UNG?

Sep 03 05:30 PM