Despite stronger air conditioning demand during the sweltering summer, natural gas related exchange traded funds are seeing warning signs as inventory supply grows to record breaking levels.
Year-to-date, the United States Natural Gas Fund (NYSEArca: UNG) fell 13.5% and the iPath Bloomberg Natural Gas Subindex Total Return ETN (NYSEArca: GAZ) plunged 44.8%.
With gas stores growing, naturals gas prices could fall even further ahead. Gas inventories banked for the winter heating season will likely exceed 4 trillion, outstripping the previous high of 3.929 trillion in November 2012, reports Gregory Meyer for the Financial Times.
The natural gas inventory build is surprising, given that this summer was hotter than the last two and the 10-year average, which added to electricity consumption that required 4 billion cubic feet more natural gas than in 2014 to meet air conditioning demand. However, energy watchers attributed the steady build in gas storage to rising output from U.S. shale oil operations.
Consequently, Bentek Energy projects that benchmark U.S. gas prices could fall toward $2.5 per million British thermal units by autumn. Nymex natural gas futures were hovering around $2.69 per million British thermal units Wednesday.
“Not much stands in the way of US gas storage inventories reaching record high levels this fall of about 4tn cu ft,” Bentek said in a report. “And that strong likelihood points to a winter of relatively weak gas prices, perhaps carrying deep into 2016.”
U.S. producers typically inject gas into storage tanks between spring through fall ahead of the winter heating season.
Observers are especially worried natural gas inventories could hit up against the 4.665 trillion cubic feet total storage capacity. Some fear that producers could unload gas on the market at discounted prices if they cannot store the excess production.
“The price implications for this are decidedly bearish,” according to Breanne Dougherty, analyst at Société Générale, as “significant volumes of natural gas will be dumped on to the market this October and November, especially if heating load is slow to ramp up.”
Moreover, a strengthening El Niño weather system could push temperatures above normal levels this winter, potentially pressuring heating demand and natural gas markets as well. [Warm El Niño Weather Could Cool Energy ETFs This Winter]
ETF traders can also hedge against falling natural prices with inverse ETFs. 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. [High Stockpiles Sap Energy from Natural Gas ETF]
United States Natural Gas Fund
For more information on the natgas market, visit our natural gas category.
Max Chen contributed to this article.