After months of sharp price swings, speculation over the impact of upcoming regulations, swap contracts, and hefty premiums to net asset value, the United States Natural Gas Fund (UNG) has finally decided to create additional shares. In a filing with the SEC late last week, UNG said it will resume offering creation baskets on September 28.
UNG openly acknowledged the issues surrounding its shares in the filing, notifying potential investors of the current premium to net asset value and noting that “management cannot predict what impact, if any, the resumption of creation activity will have on the price of the UNG units on NYSE Arca.” The filing goes on to point out that purchasing shares at a premium to NAV can result in losses if the premium disappears.
The announcement of the upcoming share issuances comes on the heels of an interesting development in the commodity futures saga. On Friday, the CME announced that it will enforce existing position limits on the NYMEX, Chicago Mercantile Exchange, Chicago Board of Trade, and the COMEX division of NYMEX.
Last month, UNG announced that it had received approval to create new shares, but was refraining from doing so, presumably to avoid having to dump shares later if regulations require them to do so.
Natural Gas Prices Rise
With all the attention focusing on the regulatory environment in which UNG exists, the fundamentals underlying UNG have nearly become an afterthought. Natural gas prices surged more than 13% on Monday, despite huge supply excesses. The rally was apparently driven in part by a report from Goldman Sachs analysts indicating that they expect natural gas prices to triple over the winter. Many energy experts see an opposite scenario as more likely for two reasons. First, natural gas storage is 17% above year-ago levels, and many supply locations are completely full. The physical properties of natural gas make it relatively difficult to transport, meaning it is more of a regional commodity (whereas crude oil is truly a global commodity).
Also weighing on natural gas prices are expectations for a mild winter. As a result of the economic downturn, many major industrials of natural gas have scaled back operations, thereby reducing demand significantly. As demand for natural gas has crumbled, crude demand has remained relatively firm, resulting in a significant pricing discrepancy. Crude oil has historically cost between six and twelve times what natural gas costs, but that ratio has jumped above 30-to-1 recently.
Disclosure: No positions at time of writing