Why Did UNG Outperform USO?



UNG versus USO

From June 9–16, 2016, the United States Natural Gas ETF (UNG) outperformed the United States Oil ETF (USO). UNG fell ~1.0% and USO fell ~9.1%.

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Why did UNG outperform USO?

UNG ended June 16 with a fall of ~0.5% after the EIA (U.S. Energy Information Administration) announced a 69 Bcf (billion cubic feet) addition to natural gas (UNG) (GASL) inventory levels. Analysts expected an addition of 64 Bcf, according to S&P Global Platts. Natural gas futures fell 0.4% and closed at $2.58 MMBtu (British thermal units in millions)—1.1% below its highest level for 2016 of $2.62 MMBtu on June 9, 2016. UNG tracks natural gas futures.

USO tracks crude oil futures. It fell due to bearishness in crude oil (SCO) (UCO) (UWTI) prices. This was driven by a rise in oil rigs last week. Since June 10, USO has fallen along with crude oil futures. It fell 9.1%, between June 9 and 16, while crude oil futures fell 3.7% over this period.

Analyzing UNG’s performance

UNG gained 32.3% between March 3 and June 16, 2016. During this period, natural oil futures rose 57.3%. On March 3, natural gas futures hit a 17-year low of $1.64.

From June 20, 2014, to date, UNG has fallen about 64.6%. Natural gas futures have fallen 43.0%. The almost two-year downturn in the energy sector started with the fall in crude oil prices from their peak on June 20, 2014.

These returns show UNG’s low returns compared to natural gas futures. This is due to small losses that UNG suffers when the fund rolls its exposure to active natural gas futures that are priced higher than the expiring futures’ contracts in the fund.

Investors can look at energy ETFs such as the Energy Select Sector SPDR ETF (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) for exposure to the energy sector. They invest in oil and natural gas–weighted stocks rather than taking direct exposure to underlying commodities. That’s the case for USO and UNG.

Natural gas–weighted stocks that are part of XOP include Comstock Resources (CRK), WPX Energy (WPX), Southwestern Energy (SWN), EXCO Resources (XCO), Ultra Petroleum (UPL), and Antero Resources (AR).

Next, let’s see why XLE underperformed other SPDR ETFs.


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