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An Oversupplied Market Will Continue to Pressure Natural Gas ETFs

This article was originally published on ETFTrends.com.

Even if natural gas prices spike in the short-term, the natgas market and related exchange traded funds will continue to suffer from a supply glut as the shale industry continues to pump out oil.

The United States Natural Gas Fund (UNG) has declined 43.0% over the past year as abundant supplies weigh on the market.

The U.S. energy industry is extracting so much natural gas that large quantities are being burned off on extraction sites to make way for oil production, and it is only expected to get worse, the Wall Street Journal reported.

An estimated 5.1 trillion cubic feet of natural gas was flared or burned off world-wide in 2018 - the equivalent to the combined consumption of France, Germany and Belgium - and the U.S. is now the number four largest flarer of gas behind Iran, Iraq and Russia.

The natural gas is being burned off because it is an unwanted byproduct of an oil well and may not be worth the cost of transporting it to the end consumer. Additionally, in the Permian Basin, the center of America’s oil patch, expanding natural gas pipelines are less of a priority than completing oil pipelines.

The depressed prices on natural gas in the U.S. and robust supply has created some anomalies in specific areas of the market. For example, the price of gas at the Waha Hub in Texas hit negative four dollars per million British thermal units while gas in the other parts of the country was around $2.50 per million British thermal units, so producers had to pay others to transport the gas away.

The shale oil boom has also experienced steeper decline rates in wells than conventional ones as the volume of crude they produce after the first years drops sharply, but the associated gas volumes fall at a much slower rate. Furthermore, the increase in shale oil drilling has also contributed to the increase in more unwanted gas.

For more information on the natgas market, visit our natural gas category.