United States Natural Gas Fund: Back in Business

After months of sharp price swings, speculation over the impact of upcoming regulations, swap contracts, and hefty premiums to net asset value, the United States Natural Gas Fund (UNG) has finally decided to create additional shares. In a filing with the SEC late last week, UNG said it will resume offering creation baskets on September 28.

UNG openly acknowledged the issues surrounding its shares in the filing, notifying potential investors of the current premium to net asset value and noting that “management cannot predict what impact, if any, the resumption of creation activity will have on the price of the UNG units on NYSE Arca.” The filing goes on to point out that purchasing shares at a premium to NAV can result in losses if the premium disappears.

The announcement of the upcoming share issuances comes on the heels of an interesting development in the commodity futures saga. On Friday, the CME announced that it will enforce existing position limits on the NYMEX, Chicago Mercantile Exchange, Chicago Board of Trade, and the COMEX division of NYMEX.

Last month, UNG announced that it had received approval to create new shares, but was refraining from doing so, presumably to avoid having to dump shares later if regulations require them to do so.

Natural Gas Prices Rise

With all the attention focusing on the regulatory environment in which UNG exists, the fundamentals underlying UNG have nearly become an afterthought. Natural gas prices surged more than 13% on Monday, despite huge supply excesses. The rally was apparently driven in part by a report from Goldman Sachs analysts indicating that they expect natural gas prices to triple over the winter.

Many energy experts see an opposite scenario as more likely for two reasons. First, natural gas storage is 17% above year-ago levels, and many supply locations are completely full. The physical properties of natural gas make it relatively difficult to transport, meaning it is more of a regional commodity (whereas crude oil is truly a global commodity).

Also weighing on natural gas prices are expectations for a mild winter. As a result of the economic downturn, many major industrials of natural gas have scaled back operations, thereby reducing demand significantly. As demand for natural gas has crumbled, crude demand has remained relatively firm, resulting in a significant pricing discrepancy. Crude oil has historically cost between six and twelve times what natural gas costs, but that ratio has jumped above 30-to-1 recently.

Disclosure: No positions at time of writing

Comments

[apppro:]

The premium that was established by a short covering scheme just 1 month ago, went mostly the way of the dodo bird yesterday. All that excitement by 2 individuals (I won't mention Cramer's name and his minion Dion) that the loss of the premium would mean an immediate & tremendous loss by long term investors - well I didn't loose any money yesterday. Did you?
The same rumormonerging and stock manipulation that took down our financial system just 1 year ago, was being attempted with UNG. It failed! Maybe now we will do something about these short traders/traitors.

Sep 15 06:51 AM

[stocknerd:]

MIld winter? Those GUESSES are just that. Long term outlooks for weather are flaky and not something an investor should rely upon.
What about a hurricane through the gulf ripping out everything in its path? Hard to predict. How about a mild but long winter? Prices of NG will go up slowly but surely.

Sep 15 08:45 AM

[basehitz:]

"The rally was apparently driven in part by a report from Goldman Sachs analysts indicating that they expect natural gas prices to triple over the winter"

Barring some freak event, the above isn't even worthy of comment.

Sep 15 09:17 AM

[75 Year Old...:]

GS surley has a LONG position in NG that theyd like to get out of so that make a Outrageous Price prediction and unload there position on the silly people who Believe what ever GS says .
There outa be a LAW against that kinda of business. But unfortuanetly GS can Do what EVER they want with NO Accountability EVER !

Sep 15 12:20 PM

[Jazzster:]

I believe "75 Year Old Citizen" correctly sees through the veil of the US investment banks. Sachs is perceived as infallible in financial matters, so the masses will always react. This gives Sachs control of the commodities markets.

The same is true of the stock market. Earnings expectations have been consistently & mysteriously surpassed over the past six months, thus driving the rally, yet those false expectations are set up by "analysts". Who do the analysts really serve?

Sachs is a master of wealth transfer, for those wealthy enough to afford its cleverness. I fear it is too powerful to be ovecome, I suspect not even Obama can put this genie back in its bottle.

Sep 15 02:24 PM

[BrotherMaynard:]

-35% roll yield is considered "back in business?"

yikes

Sep 15 03:38 PM

[Crude Oil T...:]

Sure, we all love playing day trades in UNG right now. But take your profits when you can, when this one retraces this winter retail investors are going to get clobbered.

Sep 16 11:44 AM

[beatendwn:]

Hi Jazz,

I just read your comments on NG from the summer - wish I had read those then and not now; as I have gotten beaten badly holding HNU, both for a while then, then making some gains day trading it, then losing my shirt again recently, stupidly holding it. So, I hope for some of your insight. I obviously was clueless to NG futures markets. I have a better understanding now - much too late; but am caught struggling as to whether to sell HNU now again at a huge loss when it appears Jan contracts should rise; and contango is not much of an issue for Feb and March. But with the spot price crashing again on Friday; I am at a loss. Please help. What to you think? IS HND still the trade. Or is HNU the way to go for the next 2 months and then back to HND again as the future prices seem unrealistic now.


On Sep 15 02:24 PM Jazzster wrote:

> I believe "75 Year Old Citizen" correctly sees through the veil of
> the US investment banks. Sachs is perceived as infallible in financial
> matters, so the masses will always react. This gives Sachs control
> of the commodities markets.
>
> The same is true of the stock market. Earnings expectations have
> been consistently & mysteriously surpassed over the past six
> months, thus driving the rally, yet those false expectations are
> set up by "analysts". Who do the analysts really serve?
>
> Sachs is a master of wealth transfer, for those wealthy enough to
> afford its cleverness. I fear it is too powerful to be ovecome, I
> suspect not even Obama can put this genie back in its bottle.

Nov 15 10:12 AM