Investing in Natural Gas with Exchange Traded Funds

Natural gas prices have a history of moving higher from August to December. What are prospects this year?

Thackray’s 2011 Investor’s Guide notes that U.S. natural gas prices have recorded exceptional seasonal strength from August 1^st to December 21^st during the past 15 periods. The trade was profitable in 12 of the past 15 periods. Average return per period was 42.3 percent. The sweet spot is from the end of August to the end of October. A word of caution! Natural gas prices are volatile. Returns during the past 12 profitable periods were substantial, but losses during the three losing periods also were substantial.

Seasonality by the sector is influenced by one minor and one major annual weather event that occur each fall. The minor event is warm weather that increases demand for natural gas used to produce power for air conditioning. The major event is hurricanes entering the Gulf of Mexico that frequently curtail supply. The Gulf of Mexico is the largest gas producing area in the U.S.

What about this year? Weather forecasters are predicting hotter than average temperatures in eastern Canada and the eastern U.S. states in the month of August. Weather forecasters also are predicting an increase in the number of Atlantic based hurricanes this year partially because of warmer than average temperatures in hurricane inception areas during the past few months. The National Oceanic and Atmosphere Administration (NOAA), a U.S. government entity noted that the Atlantic storm season annually averages 9-12 name storms of which five to seven storms reach hurricane strength and one to three become major hurricanes. This year NOAA is predicting 12-18 named storms of which six to ten storms will reach hurricane strength and three to six storms will become major hurricanes. Natural gas inventories currently are in the middle of their historic demand/supply range for this time of year. The demand/supply balance easily could be disrupted if current weather forecasts prove to be true.

The direct way to invest is through ownership of futures backed Exchange Traded Funds that track the price of natural gas. Direct ownership is not for the “faint of heart” due to high price volatility. In addition, futures contracts and futures backed ETFs assume additional risk when futures contracts are in contango.

The most actively traded natural gas Exchange Traded Fund is the U.S. Natural Gas Fund (UNG US$10.00). It attempts to track the spot price of natural gas in the U.S. Management expense ratio is 0.60 percent.

The second most actively traded natural gas ETF in the U.S. is the U.S. 12 month Natural Gas Fund (UNL US$30.01). The fund is based on a basket of futures contracts that expire over the next 12 months. Management expense ratio is 0.75 percent.

Claymore Investments offers the Claymore Natural Gas Commodity ETF (GAS $23.70). Units hold physical natural gas forward contracts designed to track the NGX Canadian Natural Gas Index. Management expense ratio is 0.80 percent.

Horizons offers a variety of U.S. futures based natural gas ETFs that are hedged against U.S. currency risk. The Winter-Term NYMEX Natural Gas ETF (HUN $4.35) is designed to track the NYMEX futures contract for the next January delivery. Management expense ratio is 0.75 percent. The BetaPro NYMEX Natural Gas Bull+ ETF (HNU $4.31) seeks investment results equal to 200 percent of the daily upside performance of the NYMEX natural gas contract for the next delivery month. The BetaPro NYMEX Natural Gas Bear+ ETF (HND $$9.55) seeks investment results equal to 200% of the daily downside performance of the NYMEX natural gas contract for the next delivery month. Management expense ratio for the Bull+ and Bear+ ETFs is 1.15 percent.

On the charts, natural gas currently has a negative technical profile. Intermediate trend is down. Gas trades below its 50 and 200 day moving averages. Short term momentum indicators are oversold, but have yet to show signs of bottoming. Strength relative to the S&P 500 Index turned positive at the beginning of July. Preferred strategy is to wait until late August for technical signs of bottoming before entering into the seasonal trade.

Don Vialoux is the author of free daily reports on equity markets, sectors,
commodities and Exchange Traded Funds. He is also a research analyst for
JovInvestment Management Inc. All of the views expressed herein are his
personal views although they may be reflected in positions or transactions
in the various client portfolios managed by JovInvestment. JovInvestment is
the investment manager for the Horizons family of ETFs. Reports are
available at www.timingthemarket.ca<http://www.timingthemarket.ca/> and
www.equityclock.com<http://www.equityclock.com/>. Follow him on Twitter
@EquityClock<http://www.twitter.com/EquityClock>.

Natural Gas Futures (NG) Seasonal Chart

The above chart represents the seasonality for Natural Gas Futures (NG) Continuous Contract for the past 19 years.