Monday was a pretty rocky session in the markets as Fed taper talk sliced into a decent rally and cut it back down to size. The rumors also hit many commodity ETFs as a strong dollar is usually bad news for a variety of natural resources.
Yet while many commodities struggled to open up the week, one managed to fight through the sluggish trend and finish the day markedly higher, natural gas. The potent fuel saw its futures surge on the day, helping to reverse a short term bearish trend in the space.
The biggest reason for the surge was expectations of warmer weather across much of the Midwest and the South over the next week or so. With elevated temperatures, more people are likely to turn to air conditioning, thereby putting strain on power plants (read the Comprehensive Guide to Natural Gas ETFs).
Since roughly one-fourth of all U.S. electricity is generated via natural gas, a spike in electricity demand can have a big impact on natural gas usage. This is especially true given that temperatures are expected to reach into the 90’s in Chicago later this week, while similar temperatures are expected in major cities in the South like Houston and Atlanta as well.
Meanwhile, traders are also likely eying the possibility of a tropical storm forming in the Gulf of Mexico. This region is vital to natural gas production, so any impact on supplies from this key area is also likely to boost prices.
Overall, the demand picture is improving for natural gas while there are small hopes for reduced supplies too. With this combination, natural gas was able to breakout of the commodity downtrend and surge higher on the day.
How to Play
Some of the easiest ways for retail investors to play natural gas are with ETFs. These funds track futures, but are tradable on exchanges just like stocks, allowing investors to avoid the worries of buying and selling futures on their own (also see Natural Gas ETFs: Futures vs. Equities).
In particular, the following ETFs were big movers on the day and look to be in focus the rest of this week should the weather hold up:
United States Natural Gas Fund (UNG - ETF report) - This is easily the most popular ETF in the natural gas space, with roughly $800 million invested and volume of close to 6 million shares a day. The ETF added about 3.8% on the session.
iPath Dow Jones-UBS Natural Gas ETN (GAZ - ETF report) - This was one of the best performers on the day, adding over 4.3% on light volume. Investors should note that this product has seen premium/discount issues in the past, though it is cheaper than UNG.
United States 12 Month Natural Gas Fund (UNL - ETF report) – For a more spread out approach—that holds futures across 12 different months—investors have this product from United States Commodity Funds. The ETF only added about 2.5% on the day thanks to its spread out approach, though it does better in contangoed markets.
ETFs in the natural gas market have had a very rocky history. 2013 has been a surprisingly good year though, with big gains seen to start the period (also read 3 Energy ETFs for America’s Production Boom)
However, natural gas ETFs have given back a lot of their gains in recent weeks, and are now once again underperforming the S&P 500 YTD. The recent burst is definitely encouraging though, and we will need to see a few more sessions like that—and a hot summer-- in order to make natural gas ETFs rise back up in the second half of the year.
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