Low Natural Gas Prices Hurt ETF

NEW YORK (TheStreet) -- The United States Natural Gas ETF(UNG) may have resolved regulatory concerns, but the futures-based fund continues to come under pressure from an abundance of supply that is expected to suppress future prices.

The current supply issues will keep gas prices depressed until 2015 despite a possibile economic recovery that could spur an increase in demand in the near future, according to a new report from the International Energy Agency's World Energy Outlook. Representatives said the oversupply would likely stem from this country's decreased demand for imported gas.

The report is just the latest challenge for UNG, which has come under fire in recent months. UNG managers were forced to halt the share-creation process in July of 2009 after the remaining pre-approved shares had been issued. Further concerns about regulatory changes from the Commodities Futures Trading Commission delayed the resumption of normal trading.

The interruption in the creation process caused a price bubble in UNG, as the market price of the fund was dislocated from its underlying value. UNG began trading at a premium . The normal creation and redemption of ETF share units is designed to keep these two values in line.

Despite the resumption of normal trading in late September, market pressures have created further problems for owners of UNG. The popping of the UNG premium bubble certainly contributed to UNG's 60% decline year to date, but burgeoning natural gas supply should continue to pull down the fund.