Natural gas exchange traded funds have been on a four-year losing streak as improvements in extraction techniques helped create a glut in supply. However, natural gas prices may finally reverse as companies are beginning to cut back.
EnCana (NYSE: ECA), a large natural gas produces, last week said that it will cut production by 600 million cubic feet a day, reports Gene Laverty for Bloomberg. On Wednesday, Talisman Energy (NYSE: TLM) announced it will cut spending on exploration by about $500 million this year.
“We’re seeing different folks saying they’re going to cut production and capital expenses,” Kyle Cooper, director of research at IAF Advisors, said in the article. “The temperature-adjusted storage changes are actually quite bullish. People are starting to see the bottom.”
Natural gas futures rallied late last week on the better-than-expected draw down in inventories, reports David Bird for The Wall Street Journal. The Energy Information Administration revealed that gas inventories dropped 127 billion cubic feet in the week ended Feb. 10, more than than expected 119 billion cubic feet withdrawal.
“The bulls were stampeding the shorts into covering, because the drawdown was better than expected,” Peter Beutel, president of Cameron Hanover, said in the WSJ article. However, the growing surplus “tells us that we have a steep selloff still in the works. These surpluses were already quite high. Now, they are absurd. We could come out of winter with nearly twice as much natural gas in storage.”
The natural gas market has been overflowing due to the unseasonably warmer winter months. [Is Natural Gas ETF Rally for Real?]
Additionally, the use of “fracking” techniques to extract natural gas has created a booming new industry that could propel the U.S. into the forefront of natural gas suppliers. [Natural Gas and Shale Oil Industry]
Natural gas commodity ETFs gain their exposure to natural gas prices through futures contracts. The natural gas futures market has been stuck in a state of contango. [Five Things to Know About Commodity ETFs]
“Effectively, the fund sells its soon-to-expire position and purchases a contract further from expiry to avoid physical delivery,” according to Morningstar analyst Abraham Bailin. “When the prices of those back-month contracts exceed the price of the front-month contract (known as a state of ‘contango’), the fund loses money each time it rolls its position.”
Natural gas ETFs include:
- First Trust ISE-Revere Natural Gas Index Fund (NYSEArca: FCG)
- Teucrium Natural Gas Fund (NYSEArca: NAGS)
- United States Natural Gas Fund (NYSEArca: UNG)
- United States 12 Month Natural Gas Fund (NYSEArca: UNL)
Natural gas ETNs:
- iPath Natural Gas Total Return ETN (NYSEArca: GAZ)
- ETRACS Natural Gas Futures Contango ETN (NYSEArca: GASZ)
- iPath Seasonal Natural Gas ETN (NYSEArca: DCNG)
- ETRACS Alerian Natural Gas MLP ETN (NYSEArca: MLPG)
Inverse and leveraged funds:
- ProShares Ultra DJ-UBS Natural Gas ETF (NYSEArca: BOIL)
- ProShares UltraShort DJ-UBS Natural Gas ETF (NYSEArca: KOLD
- Direxion Daily Natural Gas Related Bull 3x Shares ETF (NYSEArca: GASL)
- Direxion Daily Natural Gas Related Bear 3x ETF (NYSEArca: GASX)
iPath Natural Gas Total Return ETN
For more information on the natural gas market, visit our natural gas category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.