NEW YORK (TheStreet)The spectacular downfall of the United States Natural Gas Fund (UNG) - Get United States Natural Gas Fund LP Reporthas been one of the most watched and commented upon events within in the ETF universe. Since July 2008, the fund has been on a downward slide, dipping from nearly $65 per share to under $7. The fund's breakdown has helped it consistently earn spots among daily and weekly ETF losers' lists.
Aiding to UNG's erosion has been the fuel's dramatic oversupply, which has devastated futures prices. Typically, supply numbers have been shared with investors and industry specialists through the Energy Information Association's (EIA) monthly 914 report. The results from this document are used as a way to get a feel for the direction of the natural gas market as well as a sign of where fuel prices are headed next.
In the past, higher than forecast output numbers from this and other EIA reports have been blamed for the fuel's staggering retreat. This week, however the agency announced it is making significant changes to the way it collects data. According to the agency, the traditional methods of collecting output data is flawed and has led to notably bloated output levels.
Though no specific plans to fix this error have been detailed, the EIA insists it has already taken steps to revise its process of reporting natural gas supply. Agency representatives believe that the new means of documenting output will lead to significant downward revisions which, in turn, may lead to a boost for natural gas prices. The new methodology will be employed in the EIA's April 30 report.
On Monday, the
Wall Street Journal
examined the past method of collecting natural gas output data that had lead to exaggerated results.
In the past, the EIA surveyed only the largest natural gas producers to get a feel for current production levels. The findings from these firms were then extrapolated across the entire industry to estimate broad output levels.
What this methodology fails to reflect is the volatile production levels from the vast number of smaller natural gas producers. By overlooking these players, the statistical error of the government-issued report has grown to unacceptable levels.
Holders of UNG may see these projected downward revisions brought on by the statistical revisions as a welcome boon for the long troubled futures backed fund. However, before jumping into the ETF in hopes of playing a boost to natural gas prices, investors need to be aware that the revisions will provide little relief for this notoriously troubled fund.
While the dismal supply situation for natural gas has aided in UNG's dramatic downfall, it is only one of many factors leading the way down. (And even on that score, inventory data remains above the 5-year average.)
Additionally, UNG's performance continues to be threatened by the contango issues it has faced since last summer as well as heat from a newly reignited regulatory investigation by the Commodities Futures Trading Commission. Taking all of these factors into consideration, UNG still faces considerable hurdles.
Rather than playing the volatile and threatened futures market, ETF investors looking for exposure to natural gas should turn their attention to the various producer-focused ETF and mutual fund products currently available. A fund like the
First Trust ISE-Revere Natural Gas Index Fund
Fidelity Select Natural Gas Fund
should continue to be a more viable option for natural gas hungry investors. In the past, both FCG and FSNGX have remained relatively stable against the UNG downfall.
--Written by Don Dion in Williamstown, Mass.
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.