Seeking Alpha

Fred Pollack's  Instablog

I live with my wife in Miami Beach. I worked at Intel for 23 years, retiring in early 2001. For most of my last 8 years at Intel, I directed the planning for Intel’s future x86 microprocessors. In January 1993, I was named an Intel Fellow. From early 1999 until Fall 2000, I was Director of the... More
My blog:
Fred's Corner
  • Natural Gas ETF (UNG): Update on NAV, Futures, Premium, and Spot Prices
    This is just an update on the Natural Gas ETF (UNG), and assumes that you understand the basics which I described last week, see U.S. Natural Gas ETF: What You Need to Know. 
     
    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 3 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 2 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.

    Tags: UNG, Natural Gas, Options
    Aug 29 08:06 am | Link | 2 Comments
  • UNG, What You Need to Know
    Natural Gas on Friday (August 21, 2009) closed at ~$2.80/MMBtu – a 7-year low. If we assume that the price will rise to $5 my mid-November of this year, is UNG (the Natural Gas ETF) a good way to play this increase? Here are the key things to consider:
    1. What does the UNG fund contain? Does it own Natural Gas? No. Instead it invests in future contracts and swaps on the NYMEX and ICE exchanges. On August 11th, it owned the September contracts. The September contracts terminate on August 26th. As specified in UNG’s prospectus, it rolls its contracts 2 weeks before termination, over a 4-day period. This means that for the 4-days starting August 12th, it sold its September contracts and bought October contracts. Currently, NatGas future contracts are under severe contango, i.e. the farther out in time you go, the higher the price. The October price for NatGas is $0.42/MMBtu higher than the September price (which is just $0.02 above the spot price, of $2.78). So, the current spot price needs to rise about ~14% to equal the current price of the October NatGas contract, which closed on Friday at $3.22/MMBtu. In a month from now, UNG will have to sell its October contracts and buy November ones. At that time the spot price will be about the same as the October contract price. If we assume that the spot price moves up to $3.22, NatGas is up $0.42, but UNG has not benefited from this, since the October Futures contract has not moved, by our assumption.  Is this an isolated occurrence? Will this happen every month over the next 3 months? Look at the future prices: http://www.nymex.com/ng_fut_cso.aspx. Today (Aug 22, 2009), the December price is ~$5.02/MMBtu. 
    2. UNG is in a regulatory box. Before July, as the demand for UNG shares increased, UNG’s managers created more UNG shares, and to back them up, they bought more natural gas future contracts and swaps. They did this to keep the price of the shares reflective of the underlying value of the natural gas investments (futures and swaps). If UNG shares traded below the underlying value of the investments, the managers would go into the market and buy back UNG shares (and thereby reduce the outstanding share count), and at the same time sell some of their contracts and swaps. But in early July, UNG hit their maximum share count, 347.4M. They filed to expand this by 1 billion shares, and got permission by the SEC to do so a couple of weeks ago. However, since the CFTC is thinking about imposing restrictions on funds like UNG (because they are neither a consumer nor producer of NatGas), UNG is not creating new shares. In fact, the CFTC may impose restrictions that could force UNG to either resort to offshore trading vehicles or to liquidate the fund.
    3. There is a difference between UNG’s market price and its underlying value (NAV, or net asset value). Because of the low price of NatGas, many stock investors have been buying UNG. But because the UNG mgt is not creating more shares, the market price of UNG ($11.35) now differs from the value of its current investments, i.e. its NAV, which is $9.94. Every day UNG management posts its NAV (www.unitedstatesnaturalgasfund.com/ung_h...;So UNG is currently selling at a 14% premium over NAV. Should the CFTC allow UNG to continue its strategy (or if UNG can switch to an offshore less regulated exchange, or if UNG management decides to liquidate the fund), then the NAV and market price will align. In this case, UNG longs will suffer a ~12% loss, as the market price drops to NAV.
    4. There is a huge supply of NatGas. This could be a long and complex discourse, and quite frankly I don’t fully understand the complete picture. But I do get the Storage situation. For this, simply look at the gov’t/DOE data: http://www.eia.doe.gov/oil_gas/natural_gas/ngs/ngs.html. Pay particular attention to the chart.   Or more simply, there is far more NatGas in storage than in any August in the last 5 years. For a simplistic commentary on this: http://www.nytimes.com/2009/08/21/business/energy-environment/21gas.html and www.bloomberg.com/apps/news.
    Bottom line. I am bullish on the Natural Gas Prices over the long-term, but bearish on UNG. 
      
    Disclosure: I am short straddles on UNG (September and October). But I am short ~3X more calls than puts. In other words, I am hoping that UNG stays below ~$12.50/shr. I would prefer to simply short the stock, but cannot get the shares.  I would prefer to simply short the stock, but cannot get the shares from Fidelity (even though the short-interest isn’t high – just ~12M shares vs. 347M outstanding).
    Tags: UNG, Natural Gas
    Aug 22 09:30 am | Link | Comment!
Full index of posts »
Latest Followers
Posts by Ticker
UNG

Latest Comments


Most Commented
  1. Natural Gas ETF (UNG): Update on NAV, Futures, Premium, and Spot Prices (2 Comments)
Posts by Themes
Natural Gas, Options
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.