Natural gas-related exchange traded funds (ETFs) are now at the mercy of the weather gods. In the long-term, however, the economic recovery will play a greater role in the direction of prices.
Natural gas prices hit a seven-year low earlier this month as a result of high production, diminished demand, a mild summer and a weaker economy, writes Mike Hughlett for Chicago Tribune.
An increased supply of natural gas came via technological breakthroughs that allowed for more production per well. Now there is a high inventory of natural gas, or “gas supply glut,” because of the low demand.
The cooler summer has led to less air conditioner usage, which reduced natural gas demand for electric-power generators. The weaker economy resulted in a weakened industrial sector, along with decreased demand for gas.
Natural gas traders are weighing expectations for mild weather coupled with the large natural gas supply against a potentially colder winter, comments Jason Womack for The Wall Street Journal. Regardless of what the National Weather Service forecasts, some traders were buying up gas and betting on a cold winter.
In the long-term, analysts think that the pullback in natural gas drilling activity may result in higher prices when the economy recovers and industries demand more fuel.
The Commodity Futures Trading Commission (CFTC) decision on position limits is still awaited. In the meantime, United States Natural Gas (NYSEArca: UNG) will begin issuing new shares on Sept. 28.
- First Trust ISE-Revere Natural Gas (NYSEArca: FCG): up 45.1% year-to-date
- United States Natural Gas (NYSEArca: UNG): down 50.8% year-to=date
For more information on natural gas, visit our natural gas category.
Max Chen contributed to this article.