Exhausted Energy: Why Energy ETFs Could Plunge

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Part 3
Exhausted Energy: Why Energy ETFs Could Plunge PART 3 OF 5

Weak Natural Gas, and What It Means for UNG Investors

UNG’s performance

From March 9, 2017, to March 16, 2017, the United States Natural Gas ETF (UNG), which is designed to track active natural gas futures, fell 2.2%. Natural gas futures fell 2.4% during the same period.

Weak Natural Gas, and What It Means for UNG Investors

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Inventory data

UNG ended March 16, 2017, with a fall of ~2.2%, while natural gas futures fell ~2.7%. Meanwhile, the EIA (US Energy Information Administration) announced that natural gas (GASX) inventories had fallen 53 Bcf (billion cubic feet) in the week ended March 10. Analysts’ estimates had suggested that there would be a fall of 60 Bcf.

Bearish inventory data led to the fall in natural gas prices, but at the same time, the recent rise in the number of US oil and gas rigs could be a concern for natural gas traders.

Does UNG track natural gas futures well?

On March 3, 2016, natural gas active futures hit a 17-year low. UNG rose ~21.4% from March 3, 2016, to March 16, 2017. During that period, natural gas active futures rose 77%.

From June 20, 2014, to March 16, 2017, UNG fell ~72.2%, while natural gas active futures fell 36%. The nearly two-year downturn in crude oil prices began on June 20, 2014, lowering the sentiment in the entire energy sector.

The above numbers show UNG’s lower returns, as compared to the returns of natural gas active futures. These lower returns have been due to the small losses UNG has suffered when rolling its exposure to active natural gas futures.

Active futures were higher in price than the expiring futures contracts in the fund. Due to this contango structure in the natural gas futures market, UNG has underperformed natural gas over the last few years. Investors should keep this in mind when using USO to play longer-term moves in natural gas prices.

Natural gas exposure

Apart from the United States Crude Oil ETF (USO), which tracks crude oil futures, and the energy equity ETFs we discussed in the previous part of this series, you may want to look at other ETFs and ETNs to play natural gas prices. These energy ETFs and ETNs include:

  • the ProShares Ultra Bloomberg Natural Gas ETF (BOIL)
  • the First Trust Natural Gas ETF (FCG)
  • the VelocityShares 3x Long Natural Gas ETN (UGAZ)
  • the Direxion Daily Natural Gas Related Bull 3X ETF (GASL)

Continue to the next part for a closer look at what’s happening in crude and on Wall Street.


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