Natural gas exchange traded funds (ETFs) took a hit yesterday after the supply glut that has pressured prices all year showed few signs of easing. Can it be called a bottom?
It’s easy to question the true direction of natural gas. After all, prices have been sinking for much of this year. By August, says Energy and Capital, they were down to $4. In recent weeks, they’ve come back about 20%, but the supply report isn’t doing anyone any favors.
A few reasons why prices might stay low for some time inclue:
- A jump in shale gas development has increased resources by roughly 50% in the last decade
- The EIA forecasts that shale gas will make up 25% of U.S. natural gas production by 2035
- The number of wells has surged almost 60% in the last 10 years
- We’re not consuming what’s produced; the United States produces about 24 trillion cubic feet a year, but last year, we consumed 23 trillion cubic feet
The natural gas industry, however, isn’t as bearish in the long-term.
Take Chevron (NYSE: CVX), for example. Thomas Kaplan for DealBook reports that the energy giant Chevron has set its sight on natural gas exploration by acquiring Atlas Energy for $3.2 billion. The deal gives Chevron a foothold in the Marcellus Shale, a region in the Eastern states. [Cool Weather Could Heat Up Natural Gas ETFs.]
Overseas markets are stepping up their consumption of natural gas, too. The United States actually lags the rest of the world. India, Brazil, Argentina, Peru and other emerging countries have taken a keen interest in natural gas and have some strong growth in the sector, according to Wall Street Transcript. Natural gas companies are in talks with major car companies overseas, as well, in an effort to switch engines to burn the more efficient type of gas. [Investing In the Future With Natural Gas ETFs.]
Should you own natural gas in your portfolio? In the near-term, natural gas may be poised for some struggles while the supply evens out with the demand. That said, some funds are doing better than others, so watch the trend lines for opportunities:
- United States Natural Gas (NYSEArca: UNG): UNG is the largest natural gas fund and is 0.3% above its 200-day moving average. Watch out for contango, though.
- United States 12-Month Natural Gas (NYSEArca: UNL): UNL is about 1.2% below its long-term trend line, so keep an eye on it if you’re interested. There may be opportunities here. UNL seeks to mitigate the negative effects of contango by investing along the futures curve.
- First Trust ISE-Revere Natural Gas (NYSEArca: FCG): FCG owns the stock of natural gas companies, so contango and backwardation won’t be an issue here. It’s also solidly 8.6% above the trend line.
If you’re feeling especially bearish or bullish, consider some leverage in the form of ETFs like Direxion Daily Natural Gas Related Bear 2x Shares (NYSEArca: FCGS) or the ProShares Ultra Oil & Gas (NYSEArca: DIG). You can find even more natural gas-related offerings in the ETF Analyzer.
For full disclosure, Tom Lydon’s clients own UNG.
Tisha Guerrero 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.