UNG: The Best Way to Invest in Natural Gas

Includes: CHK, DVN, UNG, XTO
by: Kelvin Schulle

Investors, especially professional investors, were worried about UNG's 11% premium over its natural gas price in the last week and hesitated to put money into UNG. For example, Cramer on CNBC once mentioned to sell UNG because of the premium. Many retail investors who watched his show sold the next day, and they may actually have sold at the bottom if they didn't buy back the next day when premium started to close.

Here is what happened this week. On Monday, natural gas was up almost 10% and UNG was merely up 3% (meaning 7% premium closed for that day). On Wednesday, natural gas price was up again 11%, and UNG was up only 6%. If you add these two day gaps together, UNG's premium over natural gas has actually closed. UNG should start to track natural gas prices from here.

UNG is still the best investment vehicle if you want to invest in natural gas. Let's take Wednesday as an example - natural gas was up 11%, UNG was up 6%, Chesapeake Energy (NYSE:CHK) was up merely 2%, Devon Energy (NYSE:DVN) up 5%, XTO Energy (XTO) up 2.4%. UNG still outperforms most of the nat gas companies, even on this premium-closing day.

Now, some may argue that the future of ETFs is uncertain. Well, if you sell or short an ETF based on speculation that it may be delisted, then your investment style is totally insane. Even if the fund managment decided to close outstanding shares, investors will get a price much higher than today's price. $20/share for UNG is a minimum for a closing price if this ever happens.

Natural gas price stability not only boosts confidence in the nat gas service companies, such as Devon Energy, RAM Energy Resources (RAME), and Denbury Resources (NYSE:DNR), but also brings alternative energy sector back to life. Solar, uranium, wind and biomass energy all should benefit. Uranium Resource (URRE) rallied Wednesday after a long bottoming process.

Disclosure: none