Natural Gas ETFs Tumble on Big Supply Gain

Zacks

Natural gas ETFs have been in focus to start 2013, as the commodity has been one of the few strong performers in the natural resource world. This has largely been due to unseasonably cold weather across much of the country, and higher power plant demand for the potent fuel (see Natural Gas ETFs Soaring in 2013).

These factors have helped to keep natural gas in the green for much of the year, and suggested to some that a bullish trend might finally be here to stay in the market. Unfortunately, the most recent storage report was quite bearish, and could signal an abrupt end to the strong trend in the natural gas ETF market for the time being.

May’s first EIA storage report

The weekly EIA storage report is always a huge mover of natural gas markets, and this round was no different. Traders were looking for an increase of 30 billion cubic feet (bcf) week-over-week, but the actual was 43bcf.

This was a huge increase in supplies over expectations, and continued the streak of injections into the supply market after the long winter of drawdowns. Current stocks of natural gas now stand at 1,777 bcf, according to Bloomberg, as the last three weeks have pushed up supplies by over 100 bcf.

“It was a bearish injection and it may set the tone for future storage reports,” said Kent Bayazitoglu, an analyst at Gelber & Associates in Houston. “The big question is whether we’re going to start seeing mega-injections that really start to refill inventories.”

Impact & outlook for natural gas

Although this boost was less than the five-year average gain for the week—this figure stands at 67 bcf—it is clear that traders believed this was a very bearish signal. Natural gas futures slid by over 5.5% immediately following the report, and it was among the only commodities that was lower in the session.

Catalysts on the horizon are also few and far between, as this is traditionally a time of big builds in the natural gas supply market. And with mild weather expected across much of the country in the near term, supply increases could continue in May (read The Comprehensive Guide to Natural Gas ETFs).

Natural Gas ETFs in focus

For those of us without a futures account, investing in natural gas can only really be done via ETFs. Fortunately, there are a number of exchange-traded products targeting the natural gas market which can allow traders to make a directional bet on the price of the commodity, including the following ETFs:

United States Natural Gas Fund (UNG)

This ETF was down about 6% by the midpoint in the session on extremely heavy volume. In fact, the extremely liquid product was already at 8 million shares before 12:30 ET, a pretty good mark considering that the usual day sees about 6.6 million shares change hands.

The sluggish session today helps to reverse the solid trading that was seen in UNG in Friday and Monday trading. Now, the ETF is down about 3% over the past five days though it is still showing a gain for the one month time period.

Meanwhile, other less-traded natural gas ETFs-- such as UNL, GAZ, and NAGS-- were also big losers on the day thanks to this report. While each of these have some special nuances when it comes to which futures contracts they are focusing on, they were all down at least 3% on the day (with GAZ slumping more at one point, in part thanks to its premium/discount issues).

Leveraged Natural Gas ETFs

As you might expect, the day was especially volatile for leveraged and inverse natural gas ETFs, as many of these saw double digit moves on the day. Below, we have a rundown of their performances in this choppy session:

 

Long

Short

ProShares Ultra DJ UBS Natural Gas ETF (BOIL) – down 12.5% (2x leverage)

ProShares UltraShort DJ UBS Natural Gas ETF (KOLD)- up 12.4% (-2x leverage)

VelocityShares 3x Long Natural Gas ETN (UGAZ) – down 19% (3x leverage)

VelocityShares 3x Inverse Natural Gas ETN (DGAZ) – up 18.7% (-3x leverage)

Bottom Line

Once again, the storage report was key for natural gas ETFs. This time, however, the results were quite bearish, leading to a huge sell-off in the natural gas marketplace.

Many of the most popular natural gas funds were down more than 5% on the day, signaling to many that the bullish trend is now over in the space. For those that believe this will continue next time the EIA releases data, a look to the short natural gas ETFs could be an interesting idea, as they are clearly capable of enormous gains when natural gas markets are seeing big supply increases.

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Read the analyst report on UNG

Read the analyst report on UGAZ

Read the analyst report on DGAZ

Read the analyst report on UNL

Read the analyst report on GAZ

Read the analyst report on NAGS

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