An exchange traded fund that follows natural gas futures rose about 5% on Monday on heavy volume but traders are wondering whether the bounce is sustainable or simply a pause before another move lower.
U.S. Natural Gas Fund (UNG) has been pushed to new all-time lows in early 2012 with an unseasonably warm winter curbing demand for the commodity.
It has been a relentless decline for the $900 million ETF since the middle of 2008, while contango in futures market has also punished the fund. The ETF periodically rolls its futures contracts and loses money on the trade when longer-dated contracts are more expensive.
The natural gas fund has attracted bottom fishers the past two sessions following a brutal eight-day losing streak. Trading volume in the ETF is ramping up in early 2012.
Natural gas is the worst-performing commodity this year but rallied from a 10-year low Monday after Chesapeake Energy Corp., the second-largest U.S. producer, said it will cut production and reduce spending, Bloomberg reported.
“An exceptionally mild winter to date has pressured U.S. natural gas prices to levels below our prior expectations and below levels that are economically attractive for developing dry gas plays in the U.S., shale or otherwise,” said Chesapeake CEO Aubrey McClendon in a press release.
The announcement “signals that producers are beginning to respond to the sell-off that has gripped the gas market all winter,” WSJ.com reported. “Mild temperatures coupled with relentless shale gas production has battered the market, with prices still off 18% in 2012 despite Monday’s rally.”
U.S. Natural Gas Fund
Full disclosure: Tom Lydon’s clients own UNG.