After natural gas futures dipped below $3 for the first time in two years, the commodity and related exchange traded funds are warming up on cold weather next week, but any gains may be brief as temperatures could remain above normal for the rest of the month.
The United States Natural Gas Fund (NYSEArca: UNG) was up 1.4% Friday while iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN (NYSEArca: GAZ) was 1.0% higher. Over the past year, UNG declined 28.6% while GAZ fell 20.2%.
NYMEX natural gas futures surged in early trading Friday but settled just shy of $3 per million British thermal units.
Natural gas futures were heating up from a 27-month low on speculation that a cold snap could stoke demand for heating fuel next week. According to Commodity Weather Group, “a sizable chunk of arctic air” will cover the Midwest, South and East next week, reports Naureen S. Malik for Bloomberg.
However, while temperatures will drop next week, the weather will likely warm up and continue to weigh on natural gas prices after next week.
While the cold outbreak “is occurring on the anniversary of last year’s polar vortex big event, we do not expect it to reach those levels,” Matt Rogers, president of Commodity Weather, said in a note. “The other big story is the warmer pattern shift for the 11-15 day,” raising temperatures up to seasonal norms across most of the lower 48 states from January 12 to 16. [Nat Gas ETFs Diverge]
Additionally, supply remains robust due to new hydraulic fracturing techniques in shale oil beds, further weighing on natural gas prices through the season.
“We don’t look for this rally to carry above the $3 mark in today’s session despite some possible cold updates to the temperature views,” energy-advisory firm Ritterbusch & Associates said, the Wall Street Journal reports. “Production has been running at a near-record clip.”
Consequently, traders who are seeking to hedge against further declines in gas prices can use inverse ETF options. For instance, the VelocityShares Daily 3x Inverse Natural Gas ETN (NYSEArca: DGAZ) seeks to provide the daily inverse 3x, or -300%, performance of the NYMEX natural gas futures. The ProShares UltraShort Bloomberg Natural Gas (NYSEArca: KOLD) provides the daily inverse 2x, or -200%, performance of natural gas futures.
United States Natural Gas Fund
For more information on the natgas market, visit our natural gas category.
Max Chen contributed to this article.