Natural Gas ETFs Heat Up as Market Moves into Backwardation | ETF Trends

Natural gas exchange traded funds are firing up as increased electricity usage to combat the scorching heatwave across the U.S. has pushed the natural gas futures market into backwardation.

The United States Natural Gas Fund (NYSEArca: UNG) rose 10.8% over the last week and jumped 40.4% over the past three months.

On July 9, natural gas futures moved into a backwardated market for the first time in 10 months, reports Naureen S. Malik for Bloomberg.

Natural gas is in its third week of backwardation, with investors netting 4.6% annualized from rolling front-month natural gas, reports Sumit Roy for IndexUniverse.

Backwardation occurs in a market when futures contracts with a later expiration date are cheaper than the front month futures contracts set to expire.

Investors typically roll futures contracts, or sell a contract that is about to mature to avoid physical delivery of the actual commodity and buy the next month’s future contract to remain exposed to the commodity. Natural gas ETFs hold a basket of futures contracts and stand to profit when they roll higher priced contracts that are about to mature for cheaper later dated contracts.

Nearby futures contracts have gained 12% over the last five trading sessions, their largest five-day jump in a month, reports Joe Silha for Reuters.

Front month August prices were rising above the next month’s contracts as Americans let their air conditioners run to keep cool during the heat. According to the National Climactic Data Center, the first six months of 2012 were the warmest start of any year since 1895. [Natural Gas ETF May Heat Up with Weather]

“We have enough heat and enough current power utility demand for natural gas to boost the cash and the nearby futures to a premium,” Tim Evans, an energy analyst at Citi Futures Perspective, said in the Bloomberg article. Backwardation “doesn’t mean that we are running out of gas or that there’s real physical tightness as we still have a record inventory for the date.”