Natural gas futures and related exchange traded funds soared to a three-week high Monday as the commodity heated up on more frigid forecasts ahead and bearish traders scrambled to cover positions.
On Monday, the United States Natural Gas Fund (NYSEArca: UNG) rose 8.5% and the iPath Bloomberg Natural Gas Subindex Total Return ETN (NYSEArca: GAZ) gained 13.0%. Over the past year, UNG declined 50.7% and GAZ decreased 66.5%. [Natural Gas ETFs Heat Up as Winter Cold Sets In]
Meanwhile, the three-times leveraged-long VelocityShares 3x Long Natural Gas ETN (NYSEArca: UGAZ) surged 25.7% Monday while the ProShares Ultra Bloomberg Natural Gas (NYSEArca: BOIL), which takes the two times or 200% daily performance of natural gas, jumped 15.6%.
Nymex natural gas futures were 9.2% higher Monday, trading around $2.22 per million British thermal units. Natgas futures dipped to $1.755 mmBtu mid-December and touched a 16-year intra-day low.
After an unusually warm start to the winter season, signs of colder temperatures are starting to move East, an important indicator for winter heating demand, reports Timothy Puko for the Wall Street Journal.
According to Commodity Weather Group, temperatures across the Midwest and East Coast will dip to seasonal levels January 2 through January 6.
Moreover, there are signs that gas producers are cutting back from record-high production – the number of working natural-gas rigs dipped to its lowest ever in 28 years of data, according to Baker Hughes.
With the changing trends, bearish investors are now scrambling to cover their positions. Since August, money managers have held almost two bearish positions on gas for every bullish trade. With a market that heavily negative on natgas, prices are vulnerable to sharp swings as traders buy back contracts to close out short positions.
“The market is reacting a little bit to the prospect of lower temperatures in the next couple of weeks,” Santiago Diaz, energy trading associate at FCStone Latin America LLC, told Bloomberg. “Traders that were short are probably covering those positions, maybe realizing some of the gains to report at the end of the year or to get some spending money.”
According to Bloomberg, gas inventories likely dropped by 42 billion cubic feet last week, compared to the five-year average withdrawal rate of 95 billion for the period. Natural gas stockpiles were sitting at 3.814 trillion bcf on December 18, or 12.1% above the five-year average for this time of year.The U.S. Energy Information Administration will release its gas inventory report on December 31.
United States Natural Gas Fund
For more information on the natgas market, visit our natural gas category.
Max Chen contributed to this article.