3 Reasons to Be Bullish on Natural Gas

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 |  Includes: FCG, UNG, UNL
by: Tom Lydon

Natural gas futures and exchange traded funds faced headwinds earlier this year as regulatory hurdles and the Commodity Futures Trading Commission (CFTC) scrutinized providers after rapid price fluctuations. Now the tide has changed, and the natural gas bulls are out in force.

Christopher Jylkka is a 12-year power expert and a whiz when it comes to the gas and power industry. He is also an energy market consultant and a registered commodity trading advisor. For most of 2009, he’s been bearish on the commodity, but today he’s singing a different tune. Matt Hougan for Index Universe recently sat down with him to pick his brain about his about-face:

  • The primary reason he’s bullish is the weather. Forecasts are signaling that arctic air will sweet across the country next month, and last for eight to 10 weeks. That spells a long, cold winter, which translates into strong natural gas demand. [Other factors that influence natural gas prices.] Natural gas prices began to bottom after the first spate of really cold weather in the Northeast during the first week of December.
  • Industrial production accounts for an average of 30% of natural gas demand. As the economy recovers, industrial production will increase and right in lockstep should be natural gas usage.[Natural gas: Heating up this winter?]
  • Natural gas is also breaking out of a short-term downtrend. From a purely technical perspective, gas looks bullish, Jylkka says.

Which ETF investors may find most appealing depends on what the market is doing. Right now, Jylkka is bullish on the front month, which puts United States Natural Gas (NYSEARCA:UNG) in favor over United States 12-Month Natural Gas (NYSEARCA:UNL). Contango can negatively affect UNG, while UNL has exposure to the whole curve instead of just the front month. [How contango impacts natural gas ETFs.]

Investors who want to sidestep the futures issue entirely can consider a natural gas equity ETF, such as First Trust ISE-Revere Natural Gas (NYSEARCA:FCG).