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Nat Gas ETFs Hit by Supply/Demand Imbalances

NEW YORK (TheStreet) -- Excess supply and lower-than-expected demand have taken their toll on natural gas and the exchange-traded-funds that track it pushing the spread between March futures contracts and April futures contracts to a record low.

The spread between these futures contracts has narrowed by 93% this year to 3.6 cents per million British thermal unit indicating that a supply and demand imbalance is likely to keep prices of natural gas depressed through the remainder of the year.

On the supply side, natural gas production is at a 37-year high and shale gas rigs continue to increase which will further bolster supply. In fact, according to Baker Hughes (BHI), the number of horizontal rigs, which are mainly used in shale-gas drilling, was at a record in the past two weeks pushing overall production of natural gas up significantly. Furthermore, relatively calm weather conditions during a hurricane season that was expected to be more severe than normal, have resulted in an increase in stockpiles.

As for demand of natural gas, it is expected to be lower than that of last year during the winter months. The forces of La Nina are resulting in warmer-than-usual temperatures which are expected to be felt all throughout the Midwest, the East and the Northeast -- all key consumption regions of the country.

In a nutshell, increased stockpiles, elevated production and weakened demand are expected to push winter natural gas prices down influencing the following ETFs:

  • United States Natural Gas Fund (UNG)
  • United States 12 Month Natural Gas Fund (UNL)
  • iPath DJ-UBS Natural Gas TR Sub-Idx ETN (GAZ)

Written by Kevin Grewal of Smartstops.net in Houston

Grewal has no positions in the securities mentioned

Kevin Grewal is the founder, editor and publisher of ETF Tutor and serves as the editor at www.SmartStops.net , where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Prior to this, Grewal was a quantitative analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.

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