A New Trend for Natural Gas ETFs?

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

Natural gas prices and ETFs have languished as supply far outstripped demand – until now. In the last two weeks alone, the largest natural gas ETF is up more than 12%.

The United States Natural Gas Fund (NYSEARCA:UNG) has been trading higher nearly every day this week and hitting highs not seen since March, reports John Spence for MarketWatch. The fund is still down around 25% year-to-date, though.

UNG was an investor favorite for shorting during the last year as the fund was stuck in contango with the ETF selling the front month at a loss while it rolled over to buy next month contracts, remarks The Trader Next Door for Traders Huddle.

After Thursday’s trading, the fund broke through its 50-day moving average. Some short covering in the sector may prompt UNG to set a new trading range as it pulled out of its long downtrend, adds The Trader Next Door. It’s got almost 20% to go before the key 200-day moving average crossover.

UNG tries to reflect the performance of natural gas. The trust invests in natural gas futures contracts traded on the NYMEX that is the near month contract to expire. The fund is nondiversified.

Currently, natural gas prices are in backwardation, which is more favorable to UNG than it is to United States 12-Month Natural Gas (NYSEARCA:UNL) – UNL does better when it’s in contango, so investors don’t lose out on the roll yield.

To clarify:

  • Contango occurs when future prices are above the expected future spot price, writes David Harper for Investopedia. Since future prices must settle at expected future spot prices, contango implies that future prices will diminish over time as it converges with the expected future spot price.
  • Backwardation occurs when future prices are below expected future spot prices. Speculators who are “net long” will benefit because future prices are increasing to converge with expected future spot prices.

Max Chen contributed to this article.

For full disclosure, some of Tom Lydon’s clients own shares of UNG.