NEW YORK (
) -- The
United States Natural Gas ETF
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
. 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.
The U.S. already produces about 90% of its natural gas need domestically, and many companies have begun to turn to unconventional methods as a way to produce the fuel stateside. Recently, Pennsylvania officials opened nearly 32,000 additional acres of state forest for lease to shale gas drilling companies. The land is located over the massive Marcellus Shale formation.
Tumbling natural gas prices have exacted their toll on UNG. According to data from the National Stock Exchange, UNG had a net cash inflow of $308 million in October of 2009. Despite the fact that investors sunk more than $300 million into the fund, UNG's net assets fell by $263 million from September through October 2009. This drop can be attributed to the fund's falling price.
While the additional supply expected to come from shale and other means of unconventional production should further depress UNG, the U.S. companies involved in the transport, storage and production of the natural gas will see
In June, I
to avoid UNG and use the
First Trust ISE-Revere Natural Gas Index Fund
for exposure to natural gas.
FCG tracks a portfolio of natural gas producers, and is up nearly 42% year to date. While the fate of these companies is certainly tied to natural gas prices, I believe that this fund could
in the short term.
Another natural gas alternative is JPMorgan's
Alerian MLP Index ETN
. AMJ's investors gain access to the natural gas market through the stocks of companies that store and transport natural gas, many of which are structured as master limited partnerships.
-- Written by Don Dion in Williamstown, Mass.
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At the time of publication, Dion Management owns Alerian MLP Index ETN.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.