Investors Place Their Bets: Natural Gas or Crude Oil?



USO versus UNG

From November 16 to November 23, 2016, the United States Natural Gas ETF (UNG) outperformed the United States Oil ETF (USO). USO rose ~4.3% and UNG rose ~7.3%. In the previous part of this series, we discussed what drove crude oil prices lately.

UNG ended November 23, 2016, with a rise of ~2.9%. The EIA (U.S. Energy Information Administration) announced that natural gas (FCG) inventories fell by 2 Bcf (billion cubic feet). Analysts expected a rise of 7 Bcf. The fall in natural gas inventories led the rally in natural gas prices.

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Analyzing UNG’s performance

On March 3, 2016, natural gas active futures hit a 17-year low. UNG rose ~37% between March 3 and November 23, 2016. During this period, natural gas active futures rose 75.2%.

Between June 20, 2014, and November 23, 2016, UNG fell ~68.6%, while natural gas active futures fell 36.6%. The nearly two-year downturn in crude oil prices started from a peak on June 20, 2014.

The above numbers show UNG’s lower returns compared to natural gas active futures. These lower returns are due to the small losses that UNG suffered when rolling its exposure to natural gas active futures. These futures were higher in price than the expiring futures contracts in the fund.

Read How Are Energy Commodities Performing? to learn more about USO’s performance.

Energy sector exposure

So, investors should watch what OPEC does at its November 30 meeting. Investors also need to watch how the winter weather evolves to see which commodity ETF to bet on. For exposure to the energy sector, you might want to look at energy ETFs that invest in oil and gas stocks. They could be alternatives to ETFs that offer direct exposure to energy prices such as USO and UNG. These energy ETFs include the following:

  • Energy Select Sector SPDR ETF (XLE)
  • PowerShares DWA Energy Momentum ETF (PXI)
  • Vanguard Energy ETF (VDE)
  • iShares US Energy ETF (IYE)
  • Fidelity MSCI Energy ETF (FENY)
  • SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

In the next part, we’ll look at XLE’s performance compared to other SPDR ETFs.


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