aarc

Rough Times Ahead for Natural Gas

When everybody and his/her dog is bearish on UNG, then the bottom is not too far away.

Natural gas price is also affected by the season rather than storage and September to October seems to be the most bullish months for NG. Just look at the charts spanning several years for NG, NG price tend to rise even during multi-month downswings and not only during upswings during these two months.

Also the NAV just kept on rising for the last few days going from $7.xx (if my memory serves me right) to $9.12 while UNG goes up from 9 to 10.50; so the much maligned 20% premium has narrowed down to 13% even if UNG price went up last week since NAV rises faster than UNG. At the rate NAV price is going up, the premium can go zero if UNG stays put due to the dampening effects of the issuance of new shares.

If you roll over NG contracts from Oct to Nov, then there is a contango of around 26% and you will have to pay that premium. If the price of of NG does not go up and actually settles down to the previous month's price (as what initially happened to Sept-Oct contract on the first 2 weeks after rollover) until the Nov contract expiration, you lose 26%, plain and simple.

Now, the 26% contango for the roll-over is not actually 26% loss for UNG since UNG holds $3.65B in CASH, only $1.20B for NG and NN futures; the rest are in swaps. From the current ratio of Futures/Cash alone, the actual loss for UNG playing the NG/NN contracts can be only 1/3 of 26% or 8.7%. That is a lot smaller loss than trying to play the NG/NN contracts themselves assuming price of nat gas remains constant througout November.

Come January to February NG contracts for 2010 and the contango goes down to 1.34% and goes much less than that for succeeding months next year. That is a dramatic reduction for UNG losses every roll-over. Who knows, backwardation might kick in before 2010 is over and UNG will gain every roll-over dates possibly wiping out all those losses during the contango year of 2009 by 2011/2.

Looking at the monthly charts of NG; NG is definitely a cyclical commodity that goes up and down with an almost predictability like a sine wave despite the US having more than 100 years of reserves and production will almost always exceed demand since the demand is local and miniscule as compared to the massive proven reserves.

Producers will simply kept going bankcrupt at the rate they are trying to kill each other until only a few will stand and be able to control production as well as the price of nat gas.

Stop thinking linear; the price of NG goes like a sine wave.

Natural Gas ETF Suspends New Shares: Are There Alternatives?

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The author is saying stay out of UNG and better still natural gas futures and other etfs such the canadian's.

NG is a highly volatile commodity (pun intended). Just look at the monthly chart; every year, NG price fluctuates rapidly in massive percentages over very short periods of time. So if you cannot track NG on weekly or monthly basis; you may find yourself rich after several months and poor after less than a year's time or vise-versa.

NG is a buy low sell high or short high cover low for highly active speculators; definitely NOT a buy low/high sell high/higher investment that you can rely on year after year.

So buy UNG while it is being hammered to death or wait for the reversal and chase it up as fast as you can if you can.

As for UNG; either you buy NG futures and pay the extra price of contango spread yourself or let UNG does it for you. Just don't expect UNG to tract NG toe to toe because of the contango (or backwardation for that matter) effect. You will have the same price or P/L differential over an extended period of time if you keep rolling over futures contracts.