Natural Gas ETFs Tumble On Mild Weather Outlook

Thanks to some unseasonable temperatures, the outlook for natural gas was looking quite strong. The fuel tends to do well when temperatures are either too warm (spurring air conditioning demand) or too cold (boosting demand for heat), as both conditions prompt more electricity usage.

This was definitely the case across much of the country lately, as first temperatures were unseasonably warm, and then went a bit colder than normal more recently. However, the current outlook is calling for very mild temperatures, a situation which could slash demand for natural gas.

The supply demand balance could be further in jeopardy thanks to a lack of supply disruptions in the key Gulf of Mexico region. This area is responsible for a big chunk of natural gas output and is usually hit by hurricanes around this time of year. Yet, thanks to a total lack of storms so far, supply issues haven’t come into play at all so far in 2013, further adding to natural gas woes.

Due to this situation, natural gas futures faced extremely weak trading in Monday’s session, with front month futures tumbling by 3.7%. This pushed November futures down to $3.57/mm BTU, a loss of 14 cents, on a day when many other energy commodities were roaring higher.

“We have mild weather out on the horizon and heating demand is waning,” said Tom Saal, senior vice president of energy trading at FCStone Latin America LLC in Miami in a Businessweek article. “The market is putting an ample amount of gas in storage for this time of year.”

ETFs in Focus

A slump in natural gas futures also led to rough trading for the natural gas ETFs as well. Easily the most popular in this respect is the United States Natural Gas Fund (UNG), a fund with nearly $1 billion in AUM.

This ultra popular fund lost about 3.9% on the day, on volume that was nearly twice as much as normal. The five day trend is now down 2.2%, while the product is down from a one month look as well, suggesting the longer term downward trend in the market is once again creeping into the picture.

Leveraged Options

For those seeking truly large moves in the natural gas ETF market, there are a few leveraged and inverse funds worth considering. Many of these products also saw huge volume increases for the session, with triple leverage products experiencing double digit percentage moves to start the week.

Funds in this segment include bullish products like the ProShares Ultra DJ-UBS Natural Gas Fund (BOIL) and the VelocityShares 3x Long Natural Gas ETN (UGAZ) which, respectively, lost 7.5% and 12.1% on the session. Meanwhile, on the bearish side, the double leveraged fund, the ProShares UltraShort DJ-UBS Natural Gas (KOLD), surged by 7.9% while the -3x fund, VelocityShares 3x Inv Natural Gas ETN (DGAZ), jumped by 12.3% on volume that nearly hit the one million share mark.

Bottom Line

Natural gas has been a trader’s dream lately, as the product remains extremely volatile as we oscillate between heating (or cooling) days, and mild temperatures which do not require extra electricity. This trend could continue for the next few weeks as we remain in the ‘shoulder season’ for natural gas, so more rocky trading may be ahead.

Choppy trading could also pop up if a big storm strikes the Gulf to end hurricane season, so definitely be on the lookout for extreme weather on that front as well. Still, barring hurricanes or extreme temperatures, it looks like natural gas may drift downward over the next few weeks, so make sure to use extra caution if you are making a long bet on natural gas in this uncertain time of year.

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