Natural gas prices and commodity-related exchange traded funds plunged Monday after meteorologists forecasted above-average temperatures this autumn season, diminishing the demand outlook for heating.
On Monday, the United States Natural Gas Fund (NYSEArca: UNG) fell 5.3% and the iPath Bloomberg Natural Gas Subindex Total Return ETN (NYSEArca: GAZ) plummeted 11.1%, extending their losses ahead of the winter season. Year-to-date, UNG declined 28.8% and GAZ decreased 59.7%.
Meanwhile, Nymex natural gas futures plunged 8.5% to $2.09 per million British thermal units Monday, trading near their lowest intra-day level since June 2012 and moving toward their largest daily dip since August.
MDA Weather Services projected “significant warm trends” across much of the U.S. in the next two weeks, reports Nicole Friedman for the Wall Street Journal.
“The main driver for the new round of selling has been the latest…temperature forecasts, which are now projecting above-normal temperatures across most of the U.S. into the second week of November,” Dominick Chirichella, analyst at the Energy Management Institute, said. “The new warming trend will mitigate most heating-related demand for the next several weeks.”
Cold weather triggers greater demand for natural gas, which is used as the main source of heating fuel for about half of all U.S. households. The heating season from November through March is the peak period for natural gas demand.
Some analysts also anticipate the strengthening El Niño weather phenomenon, which tends to heat up the Pacific water temperatures, will cause a mild winter across the U.S. and sap heating demand this season.
“Mild weather forecasts for early winter will add stress to already-surplus storage levels,” Morgan Stanley said.
Additionally, the natural gas market has been stuck in a supply glut for years after the U.S. shale oil boom inundated the market. As of October 16, natural gas inventories were 4.5% above the five-year average, and some observers warn that inventories could continue to rise and test storage capacity. [Rising Inventory Levels Will Keep Natural Gas ETFs Pressured]
Bank of America Merill Lynch downwardly revised natural gas price projections to average $2.7 in the fourth quarter from its previous forecast of $3.2.
ETF traders can also hedge against continued natural gas weakness 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.
On Monday, DGAZ surged 16.0% and KOLD jumped 9.0%. Over the past three months, DGAZ gained 82.5% and KOLD rose 53.5%.
United States Natural Gas Fund
For more information on the natgas market, visit our natural gas category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.