This article was originally published on ETFTrends.com.
The United States Natural Gas Fund (UNG) is down almost 10% this month and is saddled with a second-quarter loss of more than 17%. Some market observers believe the commodity will continue struggling over the near-term.
Last year, natural gas consumption soared. Consumption reached a record high of 82.1 Bcfd and came from across all sectors in 2018. The majority of the consumption came from the electric power sector due to a combination of recent natural gas-fired electric capacity additions and weather.
“As more countries, particularly in Asia, switch to natural gas from other fossil fuels, demand has been rising. But supply appears to be rising even faster,” reports Avi Salzman for Barron's. “Citi analyst Anthony Yuen says that natural gas supplies have built up much faster than most analysts expected. Yuen expects a 25% surge in global LNG supply from 2018 to 2020, with more than half from the U.S.'”
Last year, the natural gas markets didn’t experience any major disruptions despite potential headwinds from Chinese tariffs. However, as the U.S. and China, both heavy consumers of natural gas, work out a permanent trade deal, it’s preventing boatloads of capital investment from entering the markets.
Natural Gas Supply Glut
While the U.S. has been pumping oil at record levels, production of natural gas has long been high, leading to supply gluts.
“The supply glut has caused prices to fall around the world, with U.S. Henry Hub prices falling to the mid-$2 range per million BTUs from $4.80 in the fourth quarter of last year, and a natural gas futures contract in Asia dropping from $12 in the fourth quarter of 2018 to $4 per million BTUs today,” according to Barron's. “Natural gas supplies are rising so quickly that European gas storage may be full two months earlier than expected, Yuen estimates.”
Commodities like agricultural goods and precious metals offer investors an alternative to divest their holdings. Often times, commodities march to the beat of their own drum compared to the broad market.
Because of this negative correlation, large downturns in the broad market may not affect commodities. Investors can participate in the commodities market by trading the actual commodity or their futures contracts.
An easier way for investors to participate in commodities is through a commodity ETF. Investing through an ETF will allow investors to reap benefits, such as tax efficiency.
For more information on the natgas market, visit our natural gas category.
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