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UGAZ: Prepare For The Rise Of Natural Gas

QuandaryFX profile picture


  • UGAZ has taken a tumble this year as poor gas demand has eroded the price of natural gas.
  • Natural gas fundamentals are changing, with a hot summer coupled with declining production expected to push prices higher.
  • UGAZ is heavily exposed to roll yield losses, so a strategic timing of a trade in the ETN makes a good deal of sense.

Over the past few months, we have witnessed the price of the VelocityShares 3x Long Natural Gas ETN (UGAZ) shed value as gas has continued to trade lower.

While this year has been difficult, I believe that we are nearing a turning point in the fundamentals. Specifically, I believe that over the coming months, we will see UGAZ reverse its past few months of declines with a strong rally in natural gas.

Natural Gas Fundamentals

To start this piece off, let’s run through the natural gas supply and demand balance to assess what variables have been impacting the market as well as form a hypothesis of where prices are likely headed.

From a broad perspective, we have generally seen a good degree of weakness in the balance in the first part of this year as supply remained strong while consumption has collapsed.

These variables have ultimately led to inventories growing against the 5-year average throughout this year.

As you can see in the chart above, the key problem for shareholders of UGAZ is that when inventories climb versus benchmarks like the 5-year average, prices tend to fall.

However, while this has been a difficult year in terms of supply and demand, I believe that we have two major fundamental shifts coming over the next few months which will dramatically change the balance to the bullish side. First off, we are expected to experience a hot summer.


What the above chart shows is that during summer, which is the peak time for natural gas power burn, we will see abnormally high temperatures across every major demand region. Granted, this is a weather forecast and therefore subject to revision – but if we see anything even similar to this actually materialize, we can expect to see record burn of natural gas demand for the summer period.

This article was written by

QuandaryFX profile picture
I work within the trading and money management industry. I have been trading and investing for several years. My style is technical execution with a fundamental thesis in place. I rely heavily on statistical analysis of the correlations between fundamental changes and price movements for generating most ideas.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (47)

Like I said, EIA storage will be very high by November.

I agree, EIA storage is going to be very high by November.
Scott W 86 profile picture
Playing UGAZ/DGAZ is like getting -120 pricing with your bookie while the rest of the market is at -105. You have no chance unless you hit and run. It is a cash destroyer.
Yes, it is a hit and run trade...my last move was pretty lucky, Dollar cost average of 13.34 and escaped Thursday around 13.90...$600 or so dollar gain on a $18k gamble...1 day later I would have been sitting on a $1,600 loss...
It's unfortunate that the EIA's inventory trend chart (above, which is currently pointed to well above 4 Tcf at EOS) does not support your thesis.
Check this out, June will be mild.


Storage at around 2.7 TCF now, I would not be surprised to see over 4 TCF at the end of next October. Just my opinion of course.
I am very long term (over 1 year out) bullish on natural gas but I would not touch leverage ETF.
Brian Cellars profile picture
Actually, inventories haven't been growing against the 5-year average "throughout" this year. Instead they grew sharply in late Dec. - early January, then held about even till March when they again grew sharply. Since then they've held about 20% above the 5 year average. If they were indeed steadily growing week after week, I would be extremely bearish, but they're not. The difference to last year has been dropping each week since March which is a somewhat bullish indicator. Anyway, thanks for the article and good information. Caution is indeed strongly advised when buying UGAZ and DGAZ.
PT Larry profile picture
@Brian Cellars This morning's job number make the best bullish case for the return of natural gas and crude oil.

Yesterday's news of the EU adding 600 billion euros is big bullish news as well.

This could be the right time to add UGAZ.
Long term hold on UGAZ? Not for me. I prefer natural gas stocks. Try to understand what UGAZ is, it can also kill you if you not careful.
We are not getting a reversal anytime soon, but a few up-legs would be better than the recent straight down.
FOMB profile picture
03 Jun. 2020
Maybe a price jump here and there but overall, it's continuing down. This current weekly pump is only because the US is threatening sanctions again, trying desperately to stop NS2. When that comes online and Europeans can get NG for 1/3 of what we are forcing them to buy it for today, what happens there? Look at the weekly or monthly charts, expand it to 30 years, it's taken out lows back to the mid 90's, and in a clear downtrend for 10 years, with each high getting lower. In the US, it's all propped up, there's no money in production, only losses. And with many other things, any profits are privatized, and the losses are subsidized by the taxpayer.
Yes, there's money to be made trading NG but it's time is over, get in, and get out. It's an odd time to pump it anyway, we're going into Summer after a warm Winter, and a pandemic?
Most of EU Nat Gas comes from Qatar/Russia.
Yes, NG is getting less expensive, as anything else does over time with supply increase and production efficiency gains...The point is it is most likely at or near bottom for this year. No, we won’t see $15 natural gas like we did four times in the early 2000’s, but $3+ is very feasible and that’s a huge gain from where we stand today, especially on a leveraged ETF.
Yantalameo profile picture
We have some cheater in this industries such as GazProm (Russia). Why it a so expensive now when the gas pricing is lowest in history?
Why do you find it expensive - their PE very low , huge projects in the pipe line ( China , Turkey NS2 ) , high dividends ....
jimwatsonnc profile picture
There is another aspect of leveraged ETF's not mentioned by the author that also works against investors. It has to do with the daily resetting of the leverage, which can drastically limit returns, especially in volatile situations. For a detailed explanation of this, check here: www.investopedia.com/... Leveraged ETF's are basically only good for day trading, or at most, a position held only a few days.
QuandaryFX profile picture
Yes I've covered this in previous articles discussing leveraged products. The problem is that the math can work both ways. You can either over or under perform depending on how volatility unfolds.
Soon because of the decay UGAZ will do a reverse split. 13 now maybe around 6 to 9 dollars.
You may be correct, but it will bounce to 15-16, then 11, then 13-14, then maybe hit your numbers if at all...it is a day-week at max trading vehicle. That is the authors point outside of the eventual rise to the sky. Though, if WTI recovers I think NG is still at risk of staying low. As ridiculous as a WTI recovery is with just as much or more inventory pressure. My last UGAZ ride was low 14’s, jumped out at 15.08, back in at 13.70...bet I get another bump this week and I will jump again.
@jzut How's this rise?? working out.
Noogii profile picture
I see it as a chance to jump on with a good risk management. What y’all think?
QuandaryFX profile picture
I would agree, but I believe that all trades need to be very cognizant of the risk present in a leveraged product.
depueman profile picture
My breakeven is 120. Do I have a chance?
Unfortunately, no. Moreover, if you're asking that question, you're likely not using this trading vehicle as it was intended to be used.
jimwatsonnc profile picture
see my comment above
You have a chance, but it's only one in a thousand. Good luck.
Last week /NG jumped nearly 10% overnight... UGAZ went up less than 5% and was actually lower by opening bell. I've traded it for years and I'm done. Theyve bought December contracts apparently due to crude inversion. Much better places to lose my money.
claymore58 profile picture
I believe an investor would be much better off trading NG futures or options than UGAZ/DGAZ. The managers of these funds have never exhibited any talent for trading. Their technique appears to be "any which way the wind blows, and to hell with their investors,"
PT Larry profile picture
Thanks for the article.
Karl Glazier profile picture
On a risk/return basis, it is far better to invest in AM with a yield of 25%, even if the gas price stays the same.
When will they cut it? No producer makes money at these prices, no?
SilverSun profile picture
It is that fear that keeps the yield so high, the div is covered x1.1
bagger10 profile picture
Soon to be 1.2x coverage because of buyback of 10% outstanding shares
Justy72727 profile picture
When does the roll yield loss occur? Put differently, when does the futures price of the front month become the spot price?
The front month is the spot price month. It expires at EOB on the 27th each month. Keep in mind UGAZ rolls to the next contract over a few days between the 7th and 12th of the month.
QuandaryFX profile picture
Essentially at expiry. But roll yield itself arises on most trading days as there's a slight (but measurable) contraction of the distance between futures and spot. Example: natural gas spot price will be up 1.5% but front month futures will be up 1.45%. Over time these small differences amount to a very large divergence of performance.
Hot summer and power burn isn't enough to make a dent in the current daily oversupply, stores over the 5 year avg and low LNG exports. The current environment is very, very bearish. The only thing that could turn things on a dime is the forecasted more active hurricane season and a hurricane or two hitting the gulf coast affecting production.That's about it. Only then you can prepare for the "Rise of Natural Gas". Power burn will be nothing but a blip in the continued fall in UGAZ due to contango close to 20c in the next 2 months...
stonkless profile picture
Traders are looking ahead not at the current status my friend.
Agreed buddy, however the author is saying power burn will cause the rise. All I'm saying is dont bet on it.
@lophlo Ok dude whatever you say you're the expert on weather fundamentals.........not. You're either manipulating or just plain dumb. Go look at July and August of 2016. That's the direction we are heading, the same similarities in weather patterns. Gas went above +3. But since you're the weather expert we are all wrong and your right. Friggin joke.
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