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Can a Heat Wave Turn Around the Natural Gas ETF?

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Natural gas prices have been pretty bouncy this year having started the winter with a bang but seeing a losing streak in summer. First, a cold snap in the U.S., then tensions in oil-rich Russia and finally Sunni Islamic militants’ attack in Iraq pushed up energy prices. However, milder temperatures lately have caused prices to fall sharply.

A mild summer actually restrained Americans from indulging in air conditioning thus resulting in higher stockpiles. In fact, this July can be tagged as the coolest in the U.S. in five years.  Not only this, a 13-year seasonal low level in power plant production also caused considerable disturbance in the natural gas prices, as per Bloomberg. In fact, in mid July, natural gas prices declined to the 7-month low level.

EIA notified that natural gas inventories – which plunged to 11-year lows in March – sprung back at the best clip since 2001. If this was not enough, shale gas output reached the all-time high in the Eastern U.S. lately.
Inventories also indicate a fast replenishment of gas stockpiles. Though it is still lower than the year-ago level and the 5-year average, the deficit level has reduced drastically. An elevated inventory coupled with subdued demand kept a check on prices.

Bloomberg noted that Goldman Sachs Group recently slashed its fourth-quarter price forecast to $4 from $4.25 to reflect these issues. Natural gas futures plunged about 12% since the onset of summer (read: A Comprehensive Guide to Oil & Gas ETFs).

ETF Impact

Along with several natural gas futures, this situation had a negative impact on First Trust ISE-Revere Natural Gas ETF (FCG - Free Report) . The fund consists of companies that derive a substantial portion of their revenues from exploration and production of natural gas (read: Anadarko's Upbeat Guidance Puts These Energy ETFs in Focus).

Since July, the fund has lost about 12.3% (as of August 11, 2014) to become one of the worst performers in the last month.  Investors should note that the slide in prices in FCG was steeper than United States Natural Gas (UNG - Free Report) – an ETF based on natural gas futures. UNG was down more than 10% during that period.  


Even with these weak performances, a long bet on natural gas equity ETFs might prove a good idea over the long term thanks to the U.S. shale-oil boom and the ever-growing need for cheaper gas across the world. Notably, the industry is currently in the top third of the list as classified by the Zacks Industry Rank (read: Play the U.S. Oil Boom with These Energy ETFs).

Moreover, in the near term, the nation is forecast to receive a heat wave which might prompt the need for more cooling. This burst of heat might finally subdue the surplus situation, and could put an end to this price fall.
Bloomberg noted meteorologists’ prediction which says temperatures will possibly remain higher than the normal levels across most of the states from August 17 to August 21 (read: Rising Energy Prices Could Boost This Overlooked Sector ETF).

As a result, gas deliveries to power plants surged 15% (as of August 12, 2014) since June 21. Though injections remain robust in recent times, investors should note that the latest shortage (against the five-year average) for the same time around was the deepest in nine years (as noted by Bloomberg). Amid such a situation, if the weather somehow becomes inclement and continues a little longer, the present scenario might take a turn.

Either way, the trends are not looking that unfavorable in the short term for natural gas investors, as the space could see some momentum shift if the meteorologists’ prediction holds true. As a caveat, investors need to first closely watch the weatherman, and then what happens in EIA storage reports, before betting their money in this corner of the market.

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