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Natural Gas ETFs on a Tear: Here's Why

Sanghamitra Saha

Natural gas prices, which have been suffering this year, rebounded last week. iPath Series B Bloomberg Natural Gas Subindex Total ReturnSM ETN GAZ added about 3.7% last week which has actually lost 28.9% year to date (as of Sep 6, 2019).

What Drove the Rally?

Per fxempire.com, the change in course of Hurricane Dorian actually fueled the rally. “While the hurricane was sitting off the coast of Florida, it was actually keeping a lid on prices because of its threat to demand, and when it became clear that the hurricane would move north, prices exploded to the upside as shorts scrambled to liquidate positions.” This has led to a massive short-covering or a “short-squeeze.”

Per fxempire, natural gas prices usually start to rise around Labor Day, or shortly after the expiration of the September futures contract. “This year, the contract expired with a record amount of shorts hold positions and they had to go somewhere once the futures contract went off the board.”

There is news that natural gas spot prices at the Waha hub in western Texas, located near Permian Basin production, recorded the highest price since March 2019 in mid-August. This price rise matches with the 2 billion cubic feet per day (Bcf/d) Gulf Coast Express Pipeline’s (GCX) preparation to enter service, per the source. The new pipeline will add to the much-needed natural gas takeaway pipeline capacity in the Permian region of western Texas and southeastern New Mexico.

Weather outlook also indicates that demand for natural gas will remain high. Warmer-than-usual temperature in most parts of the country should be a driving factor. Overall, demand will be high across Southern United States. Meanwhile, though storage of natural gas rose this spring and summer, it is still below the five-year average.

Given the bullish fundamentals, natural gas price is rising and may remain steady in the coming days. Investors should tap this trend through ETFs and ETNs. These products might be easier plays for investors seeking to deal directly in the futures market:

United States Natural Gas Fund (UNG)

The fund provides direct exposure to the price of natural gas on a daily basis through futures contracts. If the near month contract is within two weeks of expiration, the benchmark will be the next month contract to expire. The fund rose 9.2% last week.

United States 12 Month Natural Gas Fund (UNL)

This product seeks to offer spread-out exposure across the futures curve in order to mitigate contango, a huge problem in the natural gas ETF market. The investment objective of UNL is to reflect the daily changes in the price of natural gas delivered at the Henry Hub Louisiana. Its benchmark is the near month futures contract to expire and the contracts for the following 11 months, for a total of 12 consecutive months. If the near month futures contract is within two weeks of expiration, the benchmark will be the next month contract to expire and the contracts for the following 11 consecutive months. It added 6.2% last week (read: Best Commodity ETFs of 2018 to Watch Again in 2019).

iPath Bloomberg Natural Gas Subindex Total Return ETN (GAZ)

The note delivers returns through an unleveraged investment in the natural gas futures contract plus the rate of interest on specified T-Bills. It follows the Bloomberg Natural Gas Subindex Total Return Index. The product was up 9.5% last week.

Leveraged Plays

For investors seeking to play the natural gas spike for outsized profits in a short span, a leveraged bet might be the way to go. ProShares Ultra Bloomberg Natural Gas (BOILand VelocityShares 3x Long Natural Gas ETN (UGAZ) added about 19.7% and 29%, respectively, last week.

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ProShares Ultra Bloomberg Natural Gas (BOIL): ETF Research Reports
 
United States 12 Month Natural Gas Fund, LP (UNL): ETF Research Reports
 
iPath Series B Bloomberg Natural Gas Subindex Total Return ETN (GAZ): ETF Research Reports
 
United States Natural Gas Fund, LP (UNG): ETF Research Reports
 
VEL-3X LNG NG (UGAZ): ETF Research Reports
 
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