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Beaten-Down Natural Gas ETFs Surge: Will the Rally Last?

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Like in most winters, natural gas prices started receiving warmth from the chills this year. Normally, the Arctic blast of cold air gives life to this commodity every winter. The cold snap boosts electricity demand across the region, putting focus on natural gas. This year as well, forecasts of colder-than-expected temperatures in the United States might drive natural gas prices. 

Investors should note that natural gas investing has been downbeat this winter with United States Natural Gas Fund, LP (UNG - Free Report) losing 14.9% since mid-November. Natural gas futures for January delivery rose 3.8% per million British Thermal units, which is 44% lower than the year-ago period, per Wall Street Journal. The current price is still the lowest mid-December level in four years.

Natural Gas ETFs Soaring Lately: Here’s Why

The U.S. Energy Information Administration reported that domestic supplies of natural gas declined by 73 billion cubic feet for the week ended Dec 6. However, per a survey conducted by S&P Global Platts, analysts expected a fall of 74 billion cubic feet, on average, almost in line with the reported figure. Total natural gas inventory now stand at 3.518 trillion cubic feet, up 20% from the year-ago level but down 0.4% compared with the five-year average.

However, a survey provider Estimize reported that there were expectations of a 55 Bcf draw in stockpiles. A wider-than-expected decline in inventory actually boosted natural gas ETFs on Dec 12. UNG added about 4.1% on Dec 12.

Wall Street Journal reported that natural gas prices are soaring because of an expectation of colder weather. “While hopes are slim for a white Christmas, weather models are showing some cooler air and higher demand over the next 15 days,” according to Bespoke Weather Services.

ETFs in Focus

Apart from UNG, investors can consider United States 12 Month Natural Gas (UNL - Free Report) , which added 2.2% on Dec 12. Leveraged natural gas ETF ProShares Ultra Bloomberg Natural Gas (BOIL - Free Report) tacked on 6.9% gains on the day (see all energy ETFs here).

For those who are skeptical about risky futures contracts, it is worth noting that there is an equity play out there that targets the broad natural gas market in ETF form. The fund is First Trust ISE Revere Natural Gas Index Fund (FCG - Free Report) , which holds about 40 stocks in its basket and charges investors 60 basis points a year in fees. The fund added 4.2% on Dec 12.

Will the Rally Continue?

The latest jump is short term. Long-term potential for natural gas prices appears bleak. Solid storage and chances of a less inclement weather in the medium term are not likely to support natural gas prices. Basically, supply of the natural gas fuel has surpassed demand.

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