Natural Gas ETFs Cool as Global Demand Set for Biggest Drop on Record

Natural gas prices and related exchange traded funds have plunged this year as the coronavirus pandemic and a mild winter have contributed to the biggest fall in global annual demand on record.

The United States Natural Gas Fund (NYSEArca: UNG) has declined 35.4% year-to-date and decreased 45.6% over the past year while the Nymex natural gas futures now trade at around $1.76 per million British thermal units.

According to the International Energy Agency, global consumption of natural gas will drop this year by the most in history, the Financial Times reports.

Natural gas demand will decline by 4% in 2020, or 150 billion cubic meters, as every region in the world is impacted. The drop off is twice as severe as that registered after the global financial crisis of 2009 when demand around the world fell 2%.

“The record decline this year represents a dramatic change of circumstances for an industry that had become used to strong increases in demand,” Fatih Birol, head of the IEA, told the Financial Times.

Natural gas has gained popularity as a cleaner alternative to dirty coal plants, but the commodity has still drawn criticism from environmentalists, especially with more investors shifting away from fossil fuels.

After several years of strong demand, the industry has invested heavily into liquefied natural gas, especially in the U.S. where gas has been shipped to Asian markets. A record $65 billion fo capital spending was injected into LNG liquefaction facilities in 2019.

However, gas used in power generation will take a severe blow this year, suffering half of the total decline in demand. Gas-fired generation will especially fall hard in Europe due to lower electricity demand coupled with the growing use of renewables.

Furthermore, the EIA calculated a fall off from the residential and commercial sectors. The milder winter cut heating at the start of the year while government lockdowns diminished consumption by businesses.

Industrial gas demand also dropped off as expected, following the widespread shutdown measures to contain the virus-hit economies, while the energy industry itself experienced a dramatic slowdown in fuel consumption.

Birol warned that the coronavirus will have a “lasting impact” a surplus supply and investment in new capacity outweigh demand.

More aggressive, risk-tolerant traders could also continue to hedge against the plummeting natural gas prices with inverse or bearish exchange traded products such as the VelocityShares Daily 3x Inverse Natural Gas ETN (NYSEArca: DGAZ), which seeks to provide the daily inverse 3x or -300% performance of NYMEX natural gas futures. The ProShares UltraShort Bloomberg Natural Gas (NYSEArca: KOLD) provides the daily inverse 2x or -200% performance.

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