U.S. Markets closed

Natural Gas ETFs Struggle on Cool Weather Forecast

Eric Dutram

After natural gas hit 2013 highs in the early second quarter—and leading many to believe that natural gas was back on track—the commodity soon fell back to Earth. The product has struggled under weak commodity conditions, high supply levels, and uncooperative demand figures, pushing it within striking distance of the year’s lows.

Some are forecasting that this trend can continue in the near term, especially based on recent weather. Temperatures have been below average across much of the Midwest and the Northeast, with forecasts calling for moderate temperatures in the days ahead (see the Comprehensive Guide to Natural Gas ETFs).

This is important because this time frame of late July and early August is generally when natural gas demand—thanks to electricity needs by power plants for cooling—is at its peak. But with reduced temperatures, this may not come to pass, leading to more losses for natural gas in the future.

Other Factors

This time period is also key for hurricanes in the Atlantic, any of which can cause natural gas prices to rise. However, hurricane season has been pretty mild so far, and the latest tropical storm doesn’t appear like it will pan out, suggesting that this concern is off the table for now.

Industrial activity has also been somewhat lackluster lately, so power demand from these companies may be sluggish in the future. This is evidenced by recent Fed Surveys (such as Dallas) and durable goods orders (ex-transportation) which came in flat. If these trends continue, it could suggest that industrial demand for electricity may be slack as well.  

ETF Impact

These trends have rocked natural gas ETFs in Monday trading, pushing the commodity deep into bear market territory. In fact, the commodity—largely thanks to the cool weather forecast—pushed natural gas down about 3% on the day alone, a pretty big non-EIA release day drop for the product.

Natural gas ETFs also saw elevated trading levels in the session, with the ultra-popular UNG leading the way. This commodity was beating out its average full-day volume levels half way through the session, and it was down about 3%, continuing the recent trend for the commodity (also read A Month to Forget for Natural Gas ETF Investors).

Other, more spread out natural gas ETFs, such as UNL and NAGS, were also losers on the day, although their losses were minor compared to UNG (also read Forget UNG: Try These Natural Gas ETFs Instead).

Given these big moves, investors shouldn’t be surprised to learn that leveraged and inverse ETFs were also popular thanks to this forecast. Many saw elevated volume levels as well, as traders are clearly looking to position themselves differently in this market.

The leveraged ETFs, BOIL (2x) and UGAZ (3x), were down about 5.7% and 8.5%, respectively, on the session. Meanwhile, inverse products were also active, with KOLD (-2x) and DGAZ (-3x) gaining, respectively, 6.5% and 8.9% on the session.

Bottom Line

Natural gas ETFs have struggled recently, erasing memories of a solid run to start the year. Now, prices appear ready to reach 52 week lows, and could fall further from there (see more in the Zacks ETF Center).

This could be especially true if the weather continues to favor the bears, and temperatures stay moderate across much of the Midwest and Northeast. Should this be the case, investors may be in store for more losses in this market, particularly if hurricane season remains extremely mild, and commodities in general stay out of favor.

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 UNL

Read the analyst report on DGAZ

Read the analyst report on UGAZ

Read the analyst report on BOIL

Read the analyst report on KOLD

Read the analyst report on NAGS

Zacks Investment Research

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

More From Zacks.com