A relatively calm winter could lead to a persistent fall in natural gas futures and related exchange traded funds, especially for the traditional spring slide ahead.
The United States Natural Gas Fund (NYSEArca: UNG) fell 2.1% Tuesday while the Nymex natural gas futures declined 2.3% to $2.47 per million British thermal units. UNG has dropped 1.3% over the past week and has plunged 19.8% year-to-date.
Gas futures are already about 40% lower for the same period last year after record production levels and forecasts for milder-than-usual December weather dragged on the market, the Wall Street Journal reports.
Some are even bracing for prices to dip to multiyear lows at winter’s end, and people are raising bets that the spring slide will prove even greater than usual due to too much inventory when the traditional heating season is over.
Natural Gas Stock Piles
Mark Benigno, co-director of energy trading at INTL FCStone, pointed out that stockpiles have accumulated ahead of last winter when many anticipated cold temperatures that never happened. Consequently, spring came around with more natural gas in storage than expected, and this year’s record production levels further added to stores.
Given the unfavorable fundamentals, hedge funds and other speculative traders are betting on weaker prices ahead. According to the Commodity Futures Trading Commission, bets that prices would fall outnumbered bullish plays by 136,193 for the week ended November 19,
Sid Perkins, founder and managing partner at brokerage firm Ion Energy Group, argued that we would need to experience an “ice age winter” to keep prices from plunging.
“We’re likely going to come out of winter with much more in storage than we had a year ago, with no significant new demand coming online,” Perkins added.
More aggressive, risk-tolerant traders could also exploit the plummeting natural gas prices with leveraged 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.
For more information on the natgas market, visit our natural gas category.