With equity markets slipping around the world, investors have piled into U.S. Treasury securities in order to protect portfolios from a possible double dip recession. This has created an increase in demand for dollars, which has helped to weaken a variety of commodities; oil slumped by more than 3% in Wednesday’s trading. Closely related to oil is natural gas, which is a staple fuel for power plants and traditionally volatile on Thursdays due to the release of the EIA’s weekly natural gas report [read Thursdays With UNG for more on this phenomenon].
This week’s report looks to be especially in focus for a variety of reasons. First, a declining stock market and lowered expectations for growth in the U.S. economy have tempered expectations for power demand for the foreseeable future. However, weather has been extremely warm in much of the Northeast and Midwest in recent weeks, which could cause an increase in demand for the fuel–at least in the short-term–as an ongoing heat wave has send air conditioning use sharply higher in recent weeks [see Northeast Heatwave Sends Natural Gas Soaring].
Additionally, storm activity in the key natural gas producing region of the Gulf has been very low, much lighter than earlier predictions that called for a rough hurricane season. “Forecasts for an unusually active hurricane season a couple of months ago may have forced an excessive amount of storm premium into the market that is now being slowly drained on a daily basis amidst a lack of organized storm activity in the Atlantic,” analyst Jim Ritterbusch wrote in a note to clients Wednesday. With little activity on the hurricane front, investors hoping for a supply-driven rally have come up empty handed so far.
This lack of supply disruptions have helped to push natural gas prices lower as the country has accumulated quite the stockpile of the gas. According to a Dow Jones Newswires survey of 19 analysts and traders cited in the Wall Street Journal, supplies are expected to grow by 34 billion cubic feet, or about half the injection this time last year. A build of that size would bring supplies to nearly three trillion cubic feet, or about 8% above five year-average levels [see Six Reasons UNG Is Due For A Comeback].
With this report on tap, the United States Natural Gas Fund (UNG) is today’s ETF to watch. UNG attempts to reflect the changes in percentage terms of the price of natural gas, as measured by the futures contract on natural gas traded on the New York Mercantile Exchange that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will invest in the next month to expire, less expenses. The fund has been extremely popular with investors looking to establish exposure to natural gas; current assets stand at about $2.5 billion and the average daily volume is close to 25 million shares. Despite the fund’s relative popularity, it has performed poorly in recent weeks, slumping by 7.2% over the past two weeks and falling by 27.7% so far in 2010 [see more charts of UNG here].
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Disclosure: No positions at time of writing.