Three ETFs Hit by the Natural Gas Supply / Demand Imbalance

 |  Includes: GAZ, UNG, UNL
by: Kevin_Grewal

Excess supply and lower than expected demand have taken their toll on natural gas and the ETFs that track them, pushing the spread between March futures contracts and April futures contracts to a record low.

The spread between these futures contracts has narrowed by 93 percent this year to 3.6 cents per million British thermal unit indicating that a supply and demand imbalance is likely to keep prices of natural gas depressed through the remainder of the year.

On the supply side, natural gas production is at a 37 year high and shale gas rigs continue to increase which will further bolster supply. In fact, according to Baker Hughes Inc (NYSE:BHI), the number of horizontal rigs, which are mainly used in shale-gas drilling, was at a record in the past two weeks pushing overall production of natural gas up significantly. Furthermore, relatively calm weather conditions during a hurricane season that was expected to be more severe than normal, have resulted in an increase in stockpiles.

As for demand of natural gas, it is expected to be lower than that of last year during the winter months. The forces of La Nina are resulting in warmer than usual temperatures which are expected to be felt all throughout the Midwest, the East and the Northeast- all key consumption regions of the country.

In a nutshell, increased stockpiles, elevated production and weakened demand are expected to push winter natural gas prices down influencing the following ETFs:

  • United States Natural Gas Fund (NYSEARCA:UNG)
  • United States 12 Month Natural Gas Fund (NYSEARCA:UNL)
  • iPath DJ-UBS Natural Gas TR Sub-Idx ETN (NYSEARCA:GAZ)

To further mitigate the risks involved with investing in the previously mentioned securities, implementing an exit strategy which identifies specific price points at which further downward price pressure is likely to prevail is important.

Disclosure: No positions