Over the last week (8/21 to 8/28), the spot price of natural gas (Henry Hub) dropped from $2.80/MMBtu to $2.50, the October futures contract dropped from $3.22 to $3.03, UNG’s stock price dropped from $11.35 to $11.13, and UNG’s NAV dropped from $9.94 to $9.35.
So UNG is now selling at a 19% premium over its NAV [(11.13-9.35)/9.35)], vs. 14% a week ago.
Over the next three weeks, the price of the October futures contract (which is what UNG holds) will get within a few cents of the spot price – on August 21st, the September contract was just $0.02 above the spot price. I’ll assume 3 cents for mid-September.
So, if the spot price moves from $2.50 to $3.00 (i.e. over the next 3 weeks), the October futures price remains unchanged, and UNG’s NAV also will remain unchanged.
On the other hand, if the October futures contract drops to 3 cents above the current spot price (i.e. to $2.53), UNG’s NAV will drop from $9.35 to $7.81. If UNG gets out of its regulatory box with the CFTC (possible, but unlikely to happen over the next 3 weeks), UNG’s market price will align with its NAV.
Over the long-term, a natural gas price of $2.50 is not sustainable. However, over the short term, next 2 months, it is a different story. In the DOE’s weekly storage report (Thursday, 10:30AM), the amount of natural gas in storage (3,258 Bcf) is way above the 5-year historical range for this time of year.
The record amount in storage was on Nov. 2, 2007, at 3,545 Bcf. Friday’s Bloomberg article (Natural Gas to Fall as Weak Demand Bolsters Supply):
Supplies may reach 3.9 trillion cubic feet, which would be near U.S. storage capacity, according to Energy Department data.
Because it is cooler in September and October, these are months when significant amounts of gas are put in storage.
Also, here are a few quotes from DOE's Natural Gas Weekly Update.
At 3,258 Bcf, working gas stocks are about 7 weeks ahead of the normal fill rate, exceeding the 5-year average (2004-2008) level of 3,242 Bcf for October 9.
Warmer-than-normal temperatures in most of the Census Divisions in the lower 48 States during the week ended August 20, 2009, likely contributed to the below-normal level of injections into storage. Based on the National Weather Service’s degree-day data, temperatures in the lower 48 States during the week were, on average, more than 2 degrees warmer than normal and 3 degrees warmer than last year’s levels.
So, given the supply/demand and storage situation, it is difficult to make a bullish case for the natural gas spot price over the next two months.
Perhaps the only thing that could change the equation would be a major hurricane in the Gulf, and we are just now entering prime hurricane season. Currently, there are no near term threats (National Hurricane Center).
A more likely situation is a piling into UNG stock to reach an ungodly premium to NAV (i.e. similar to what happened to AIG, FNM, and FRE over the last week).
Disclosure: I am short straddles on UNG (September and October). But I am short ~4X more calls than Puts. In other words, I am hoping that UNG stays below ~$12/shr, and below $11/shr would be somewhat better. But below $8, not good.