NatGas ETF Demand Surges As Prices Fall

More than $1.5 billion has flowed into the two largest natural gas exchange-traded products this year, even as prices have cratered. 

Senior ETF Analyst
Reviewed by: Sumit Roy
Edited by: Sumit Roy

It's that time of the year again: Temperatures are dropping across the country and meteorologists are releasing their forecasts for the coming winter. In a matter of weeks, Americans will be turning up their thermostats.

One market, above all, is paying close attention to these seasonal trends―natural gas.

The energy commodity is the primary heating fuel in the United States, and tends to see a large increase in demand during the winter months. The period between November and March is critical for natural gas.

A colder-than-normal winter could drain inventories much more than expected, pushing prices significantly higher. On the other hand, a warm winter―as was experienced during the past two years―could leave stockpiles bloated by spring, pushing prices far down.

Warm Winter Repeat?

If the top government forecasting agency is right, expect the pattern of warm winters to continue during the 2017/2018 season. The National Oceanic and Atmospheric Administration (NOAA) says that "La Niña," a weather pattern in which ocean water in the Eastern Pacific Ocean cools, may make a repeat appearance this season.

La Nina is often associated with warm winters in the U.S.

That's bad news for natural gas, which was already struggling with surging supply levels that pushed prices for the fuel down more than 20% so far this year to less than $3/mmbtu. The United States Natural Gas Fund (UNG), the $564 million fund that tracks the commodity, fell an even greater 30% due to roll costs from contango.


Natural Gas Price


Huge Inflows

With such a dismal outlook for natural gas heading into its most critical season, one might expect inventors and traders to be shunning the commodity. Quite the contrary.

Rather than heeding NOAA's warning about this winter, ETF buyers are betting on natural gas in droves, hoping that the forecasting agency is wrong about its weather outlook.

It's not just UNG that's seeing interest. That fund has seen respectable flows of around $200 million this year. But the bigger money is heading into the $860 million VelocityShares 3X Long Natural Gas ETN (UGAZ), which had inflows of a whopping $1.4 billion this year, including $114 million last Thursday alone.

Whoever is buying UGAZ doesn't seem to mind that the exchange-traded note (ETN) is down more than 76% this year and 99.8% since its inception in 2012. Buyers seem to be either gambling on frigid weather or hoping that natural gas has fallen to the point where it may see a bounce regardless of how winter temperatures turn out.


YTD Returns For Natural Gas, UNG, UGAZ


The Bull Case

If Vincent Piazza and Evan Lee are right, the latter may turn out to be the case. The two energy analysts at Bloomberg believe natural gas prices are poised to climb this winter for various reasons.

"Sentiment heading into the critical withdrawal season has likely bottomed with Henry Hub natural gas benchmarks down more than 20% this year on elevated production," the analysts wrote. "The backdrop has improved as heating demand should be higher this winter on easier comparisons while storage levels kick off the season on par with the five-year average."

Growing U.S. production is already priced into natural gas at these levels, according to the analysts. Instead, the market will be more focused on demand trends going forward, which are supportive.

Industrial, residential, electric and commercial demand are expected to be strong. At the same time, exports of liquefied natural gas may grow, as five LNG trains become operable by the end of the winter, tightening supplies in the domestic market.

"Natural gas appears at elevated risk of a winter chill, with U.S. storage levels declining at the greatest rate in four years as exports approach a record 11% of production," said the analysts, who added that there is a low probability of a third-straight mild winter.

They claimed that "a breakout toward $4 is increasingly likely," which would represent a 33% increase from current prices.

If that happens, UGAZ, which provides 3x exposure to daily movements in natural gas futures, could potentially double from here.

The Bear Case

Of course, not everyone is convinced that natural gas prices are ready to pop. Michael Cohen, head of energy markets research at Barclays, told he sees prices remaining below $3/mmbtu next year.

"The story with natural gas is there's just a lot of supply and not a lot of incremental demand," Cohen said. "The incremental demand is related to an increase in exports to Mexico and an increase in LNG exports. But the problem is that those incremental exports are not really sufficient to overtake the fact that in the Marcellus, Haynesville and in the Permian, you've got so much new supply."

Cohen explained that he would turn more bullish if lower oil prices spurred energy companies to cut back on oil drilling, thereby reducing the “associated natural gas production” that comes from those wells.

Contact Sumit Roy at [email protected]


Sumit Roy is the senior ETF analyst for, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for, with a particular focus on stock and bond exchange-traded funds.

He is the host of’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays,’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.