Lighter Inventories Lift NatGas ETFs

Natural gas was last trading up by 1.8 percent to $2.77/mmbtu after the Energy Information Administration reported that operators injected 53 billion cubic feet into storage last week, below most analyst estimates which ranged from 55 to 60 bcf.

The United States Natural Gas Fund (UNG | C-100), the largest natural gas ETF by assets, was last trading up by 1.8 percent to $13.19. At the same time, the VelocityShares 3x Long Natural Gas ETN (UGAZ), a very popular leveraged product, added 5.5 percent to reach $1.91.

Natural Gas

The latest injection was below last year’s build of 88 bcf and a hair under the five-year average build of 54 bcf.

In turn, inventories now stand at 3,030 bcf, which is 475 bcf above the year-ago level and 76 bcf above the five-year average (calculated using a slightly different methodology than the EIA).

The weather last week was close to seasonal norms.

According to the Edison Electric Institute, utilities generated 88,044 GWh in the week ending Aug. 15, up 5.8 percent from a year ago.

Looking forward, the NOAA’s 6- to 10-day outlook calls for mixed weather across the United States.

Performance

After today's rally, natural gas futures are now down 3.6 percent year-to-date. UNG has underperformed with a 10 percent loss. Roll costs due to contango, a situation where front-month futures contracts are cheaper than subsequent months, have hurt returns for the fund.

UGAZ, the three-times leveraged ETN, has unsurprisingly fared worse, with a 51.1 percent year-to-date loss. UGAZ must contend both with roll costs and performance drag from daily rebalancing.

YTD Returns For Natural Gas Futures, UNG, UGAZ

Outlook

The latest inventory data from the EIA were neutral, as the inventory surplus against the five-year average inched down from 77 to 76 bcf and the inventory surplus against a year-ago decreased from 510 to 475 bcf.

The weather last week was very close to seasonal norms, and likewise, the injection came in right around the five-year average. That suggests that the market is balanced, from a supply and demand perspective.

Natural gas prices have hovered in the $2.50/mmbtu to $3 range all year long, and there is little impetus for them to break out in either direction.

On the supply side, production is flattening after skyrocketing in 2014. Low prices have dampened producers' enthusiasm for drilling, and in turn, lower-48 output has remained in the 80 to 82 bcf/d range throughout the first half of the year, according to the EIA's latest data.

Unfortunately for the bulls, the demand side is tepid as well. After a strong 2014, industrial demand has been down slightly so far this year. Electric power demand is up substantially from last year (3 to 5 bcf/d), but that's largely due to price-sensitive coal-to-gas switching that turned on after natural gas prices crashed below $3 at the start of the year.

That demand would evaporate at higher prices; thus, natural gas may remain range-bound in the near term. That said, there may be room to rally later this year as Cheniere Energy begins exporting U.S. LNG for the first time and the Northern Hemisphere winter kicks into gear.

Contact Sumit Roy at [email protected].