Natural Gas ETF Filling Up With Hot Air

Investors poured into U.S. Natural Gas(UNG Quote) last month, and for their efforts, the fund just hit another new 52-week low. It isn't a great vehicle to short natural gas, however, because yesterday the fund's issuer suspended the issuing of new shares pending regulatory approval for a massive expansion.

If there are more buyers than sellers (and interest has been strong), shares are likely to trade at a premium even if the price of natural gas declines -- something the fundamentals and technicals would imply.

Even though the fund is a huge portion of the futures market, it is not a large portion of the overall natural gas market. As of last week, inventory was 20% above the five-year average, according to the Energy Information Administration. Natural gas consumption is split almost evenly across industrial, residential and commercial and electric power demand. Meanwhile, 70% of petroleum flows to the transportation sector of the economy.

The difference may account for why natural gas prices have remained stubbornly low, along with the fact that natural gas is produced domestically. Economic weakness in the manufacturing sector, consumers tightening their belts and a cool summer in many parts of the country are all playing a role in lower prices. In addition, natural gas is produced domestically, and in the absence of a natural gas cartel in this country and aside from drilling restrictions, the market is relatively free.

As crude oil was marching higher in the spring and PowerShares DB Oil(DBO Quote) was advancing more than 60% from mid-February into June, natural gas plumbed its lows, with U.S. Natural Gas(UNG Quote) down nearly 30% at a new 52-week low.