U.S. Markets closed

When Does the Incredible Natural Gas Rally End?

Eric Dutram

Thanks to one of the worst winters in decades, many people across the Northeast and the Midwest have seen extreme temperatures. This has led many to keep their heat running nearly non-stop, a situation which has slashed disposable income and has greatly impacted natural gas prices as well.

After all, nearly half of Americans use natural gas as a heating source for their homes, so with near record temperatures it isn’t too surprising to note that natural gas has seen a significant boost over the past few months. Prices were around the $3.5/mm Btu level for much of 2013, but they have spiked to around the $6 level now.

While this sudden surge has certainly hurt consumers, it has been a boon to those who are invested in the natural gas space.

Natural Gas Investing

Easily the most popular way to play this trend is with the United States Natural Gas Fund (UNG), an ETF that invests in front month futures contracts of natural gas. The product has been on an incredible run over the past three months, adding close to 50% in the time frame.

This is particularly interesting because natural gas doesn’t exactly have a great long-term history, at least represented by UNG. That is because natural gas usually trades in contango, and when ETFs like UNG roll their contracts from one month to the next, there is an unfavorable price situation which usually makes long-term gains nearly impossible (see The Three Biggest Mistakes of ETF Investing).

In fact, even with 2014’s incredible surge, UNG is still down over 80% in the past five years. This obviously compares extremely unfavorably to the S&P 500 (which saw a gain of about 150% in the same time frame) and even the natural gas equity space, where the top fund, FCG, has more than doubled in the past five year time frame, suggesting that the futures curve isn’t exactly UNG’s friend.

Additionally, supplies of natural gas are truly enormous, with the current stockpile extending past the one trillion cubic feet level. And with fracking techniques and higher natural gas prices, the temptation to put more supplies on the market will be enormous, likely acting as a weight on natural gas prices in the near future.

So thanks to this longer term drag in the natural gas market and the massive (and seemingly endless) supplies of the commodity, I am eying this natural gas surge as interesting opportunity to make a short play on this hot resource.

And fortunately thanks to the ETF market, there are a number of ways to do this. Personally, I like the triple short natural gas ETN DGAZ, but there is also a double short KOLD product on the market as well.
These have obviously been beaten down significantly in the YTD time frame, but with a slump back to Earth in the natural gas market, either of these could be big winners (though extremely volatile and unwise for long-term investors).

However, with reports of yet another ‘Polar Vortex’ hitting the country, I am worried about making a play on natural gas right now. But once this next round of cold weather passes, I am definitely considering a move into one of the short natural gas ETFs out there.

But what about you?

Do you think the natural gas rally still has some staying power, or is a reversal at hand in this market?

Let us know in the comments section below!

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Read the analyst report on UNG

Read the analyst report on DGAZ

Read the analyst report on KOLD

Read the analyst report on FCG

Zacks Investment Research