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Nat Gas ETFs: The Hottest Game In Commodities

It's no secret natural gas and the related exchange traded funds are setting a torrid pace. Led by the United States Natural Gas Fund (NYSE: UNG), the de facto ETF choice for exposure to this commodity, three of the seven ETFs that hit 52-week highs Wednesday were natural gas products.

On volume that was more than 13 times the daily average, UNG soared 18.9 percent Wednesday, good for one of the best percentage gains among non-leveraged ETFs.

What Happened

UNG, which tracks front-month natural gas futures, is up more than 68 percent year-to-date, well ahead of the 1 percent returned by the S&P GSCI Total Return Index, a broad commodities benchmark. Wednesday was the biggest intra-day gain for natural gas in more than 14 years. Dwindling supplies ahead of colder winter temperatures are among the factors boosting the commodity.

“U.S. supplies of natural gas in storage stand about 16% below their five-year average as of the week ended Nov. 2, according to data from the Energy Information Administration, which will issue its latest updated supply figures Thursday morning,” reports MarketWatch.

Why It's Important

The United States 12 Month Natural Gas Fund (NYSE: UNL) joined UNG in the natural gas party. UNL tracks a basket of longer-dated natural gas futures in an effort to reduce investors' potential exposure to contango, the scenario where a commodity's futures price is above the expected spot price.

UNL isn't nearly as heavily traded as UNG, but the former hit a 52-week high yesterday, jumping 7.34 percent on volume that was more than seven times the daily average. Some of the ebullience aimed at natural gas and products like UNG and UNL is attributable to short covering. The commodity is up 35 percent just this month, a move that has forced bearish traders to cover short positions. Expectations for cold weather are helping, too.

“The panic was not limited to traders covering their shorts—Jacob Meisel, chief weather analyst at Bespoke Weather Services claimed that prices could reach $7-$8 MMBtu if December and January were really cold,” according to OilPrice.com.

What's Next

Interestingly, fourth-quarter flows to UNG and UNL have been modest. As of Nov. 13, UNG had $5 million of fourth-quarter inflows while UNL had no inflows or outflows for the current quarter.

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