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Natural Gas ETFs in Focus as Prices Soar

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For the first half of the year, domestic natural gas supply and consumption was rampant buoyed by increased production in Appalachia and surging demand across all sectors. U.S. dry natural gas production rose 7.4 billion cubic feet per day (bcf/d) —10% year over year (see: all the Energy ETFs here).

Per U.S. Energy Information Administration (EIA), domestic supply, which includes production, imports and storage withdrawals, was 93 bcf/d for the first six months, reflecting a 12% increase year over year. Industrial consumption soared to a record 20 bcf/day with consumption and exports aggregating to 93.2 bcf/day for the first half of the year — marking a 12% increase for the same period last year.

Per EIA, net natural gas exports from U.S. averaged 0.87 billion cubic feet per day, which is more than double the average daily net exports during the entire 2017 (0.34 billion cubic feet per day). In 2017, for the first time in 60 years, the United States became a natural gas exporter. Exports surpassed imports in five out of six months this year.

Demand for natural gas is expected to increase with time as generators have started using cleaner gas fired engines rather than the dirty, coal-fired power plants. Gross production has increased in the country, with production enhancement in the Appalachian Basin in the Northeast, the Permian Basin in western Texas and New Mexico, and the Haynesville Shale in Texas and Louisiana. Per EIA, these three-regions accounted for around 50% of total domestic production. Longer well laterals, new drilling and completion techniques have contributed to stellar production in these regions.

Per EIA’s short-term energy outlook, net natural gas exports will continue to rise till end of this year as additional LNG export capacity comes online and the natural gas infrastructure in Mexico start operations. The average of net natural gas exports are estimated at 2 bcf/d this year and 5.8 bcf/d next year.

Globally, demand for liquefied natural gas (LNG) is hot. This is one of the primary growth drivers for the booming natural gas market in the country.

Per International Energy Agency report, America could surpass Qatar and Australia to become the largest exporter of LNG within the next 5-7 years. The LNG export business is set to boom from 3.5 Billion cubic feet per day (Bcf/d) today (nearly 4% of total U.S. gas production) to 10-12 Bcf/d by 2021, nearly 30% of the current global market. Gas production is increasing continuously and export terminals are scheduled to increase to six by the end of next year.

Asia is the primary driver for increasing LNG demand, with China being the front runner. Per International Gas Union, global LNG trade increased by 35.2 million tons and China accounted for more one-third of it, thereby, becoming the second-largest importer behind Japan, surpassing Korea.  Per Bloomberg New Energy Finance’s latest global LNG outlook 2018 report, LNG demand is expected to grow by 8.5% in 2018, half of it attributable to China followed by Japan, South Korea and India (read: Higher Oil Prices to Spell Trouble for These Country ETFs).

However, the natural gas export space has hit a roadblock with China imposing 10% tariffs on U.S. liquefied gas starting Sep 24. This has curbed the business for American LPG producers as increased prices make it less competitive in a thriving China market (read: U.S. Natural Gas Exports Hit by Tariffs: ETFs in Focus).

The natural gas space is thriving this year and holds more promise, putting related ETFs in focus:

United States Natural Gas Fund UNG

It tracks the natural gas futures. AUM is $340 million and expense ratio is 1.3%. The fund has returned 11.8% year to date.

First Trust ISE-Revere Natural Gas Index Fund FCG

It tracks the ISE-Revere Natural Gas Index. AUM is $134.6 million and expense ratio is 0.60%. It has returned 1.1% year to date. It has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

United States 12 Month Natural Gas Fund UNL

It tracks the natural gas futures. AUM is $5.3 million and expense ratio is 0.90%. The fund has returned 5.3% year to date.

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