Natural gas exchange traded funds are burning up, with gas futures breaking to a three-and-a-half year high, as the winter freeze keeps demand for heating fuel hot.
The U.S. Natural Gas Fund (NYSEArca: UNG) jumped 7.2% Friday. The ETF is up 10.3% so far this year.
NYMEX natural gas futures also gained 7.2% Friday, trading around $5.07 per million British thermal units.
Demand for natural gas for heating fuel has been rising in recent weeks as households in the Midwest and East Coast try to stave off the winter chill. U.S. inventories declined to 2.423 trillion cubic feet as of Jan. 17, or 13% below its 4-year average for the period, reports Nicole Friedman for the Wall Street Journal.
According to the Energy Information Administration, about half of U.S. homes utilize natural gas as their primary heating fuel.
“This cold period is just extending…further out into the future,” Matt Smith, an analyst at Schneider Electric SA, said in the article. “You’re seeing weather advisories from Canada down to the Gulf Coast, freezing conditions across virtually the entire U.S.”
Weather forecaster WSI Corp points to weather models predicting an “extreme spell of cold weather” in the eastern U.S. early next week before another Arctic blast in the next 11 to 15 days.
On the supply side, the abnormally cold weather has caused production to slow – a type of “freeze-off” can cause liquid to freeze inside pipes at wellheads, limiting a pipe’s capacity. Ryan Smith, energy analyst at analytics firm Bentek Energy, said production was 1.8 billion cubic feet a day lower Thursday than it was Monday.
Other natural gas ETFs are also gaining ground on the increased natural gas usage. the United States 12 Month Natural Gas Fund (NYSEArca: UNL) is up 3.9% year-to-date and the Teucrium Natural Gas Fund (NYSEArca: NAGS) is 2.8% higher so far this year. The two natural gas ETFs track a basket of later-dated futures contracts. While holding multiple contracts with varying maturities could help even out the performance, the funds can underperform in a backwardated market – a downward sloping futures curve where contracts with a later date are cheaper than the current spot price. [Natural Gas ETFs Look Toasty During Artic Blast]
Investors interested in a more aggressive approach to natural gas can look at the ProShares Ultra DJ-UBS Natural Gas ETF (NYSEArca: BOIL), which attempts to deliver twice the daily performance of natural gas, and VelocityShares 3x Long Natural Gas ETN (NYSEArca: UGAZ), which tries to provide three times the daily performance of natural gas futures. BOIL surged 13.9% Friday while UGAZ gained an impressive 20.8%.
Due to the daily rebalancing and compounding effects over time, the leveraged funds may not perfectly reflect their 2x or 3x strategies over a long period. Investors have typically used geared funds as a short-term hedges or as speculative plays.
U.S. Natural Gas Fund
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