Yesterday, the United States Natural Gas Fund (UNG), one of the largest and most heavily-traded exchange-traded commodity products, hit its all time low, falling nearly 4% on signs of weak demand and expectations for balmy weather across the country. Since its inception in April 2007, UNG has been one of the most popular and controversial tickers in the ETF industry. It’s also been one of the most volatile, a trait that attracts short-term traders with a big appetite for risk. But one day of the week stands out as particularly active: as many energy traders are well aware, UNG is generally a big mover–both up and down–on Thursdays.
UNG’s Explosive Growth…And Wild Ride
When UNG launched in April 2007, there were already a handful of commodity products (DBC had launched more than 14 months previously). The market’s reception to a fund offering exposure to natural gas prices was a positive one, and UNG saw moderate cash inflows for the first year and a half of its existence. At the beginning of 2009, UNG’s assets had grown to more than $700 million, making it one of the largest exchange-traded commodity products. But the fund’s growth to that point was nothing compared to what lay ahead.
One of the recurring stories in recent years (at least around every major election) is the need to reduce the country’s dependence on foreign oil. A number of alternatives have been proposed–including wind, solar, and water power–with limited success. As the campaign for natural gas as the “fuel of the future” picked up steam–thanks in large part to the high profiles and deep pockets of some major supporters–investors (mostly small, individual investors) began rushing to get a piece of UNG. The fund saw cash inflows of $5.7 billion in 2009, more than all but three other ETFs (GLD, EEM, and TIP). UNG finished the year with assets of $4.6 billion and an average daily trading volume of 30 million shares.
Not surprisingly, the increase in assets led to an increase in scrutiny. UNG had become so large that it controlled a significant portion of the near-month NYMEX natural gas futures, raising concerns over the fund’s contribution to speculation in natural gas markets. After the SEC declined to immediately authorize the issue of additional shares, UNG began acting like a closed-end fund, at one point trading at a 20% premium to its net asset value. UNG ultimately began issuing new shares, and the premium disappeared, as many warned it would.
UNG also introduced a new word into investor vocabularies: contango. Because UNG utilizes a futures-based strategy to accomplish its objectives, its price depends not only on changes to the spot price of natural gas, but on the slope of the futures curve as well. In 2009, natural gas markets were consistently contangoed, but prices remained relatively stable, resulting in a wide gap between a hypothetical return on spot prices and UNG’s share price. Natural gas prices were basically unchanged in 2009, but UNG lost more than 50% of its value to the “roll yield” (see What’s Wrong With UNG? for a closer look at how contango impacts UNG).
UNG’s Thursday Swings
UNG is no stranger to volatility–it regularly moves up or down by at least 100 basis points in a single session–but the fund has seen particularly large movements on Thursdays. The timing is no coincidence: that’s the day the Energy Information Administration (EIA) gives its natural gas storage report, a highly anticipated data release that details the current level of natural gas inventories in the U.S. (due to physical properties that make transfer and storage difficult, natural gas is largely a local commodity, as opposed to crude oil which has a more global market). UNG is generally active throughout the week, but the EIA storage release is always the high point.
While the weekly change in natural gas inventories is estimated by a handful of energy analysts, the actual tally often varies significantly from expectations. When the weekly EIA report shows that inventories either fell by more than analysts had anticipating or increased by less than expected, it’s generally an indication of strong demand for natural gas, and UNG tends to rise. When stocks fall by less than expected, it’s generally an indication of weak fundamentals for natural gas. One way or another, UNG is generally very active surrounding the release of the EIA bulletin.
UNG’s price has moved by at least 200 basis points in more than half the trading sessions since its inception. In about 10% of Thursday sessions, UNG moves by a whopping 5% or more. The median daily basis point change on Thursdays (on an absolute basis) is 2.2%, higher than any other day of the week.
|UNG’s Average Volume|
|Other Days||11.3 million|
|Since inception. Source: Yahoo! Finance|
Not surprisingly, UNG’s trading volume generally surges around the weekly data release. Since its inception, UNG’s average Thursday trading volume is about 14.7 million shares, roughly 30% higher than other days of the week.
Unfortunately for investors looking to make a quick buck, UNG’s big Thursday swings come on both the upside and the downside. But it is obvious from looking at the chart above that Thursday returns are skewed towards the negative, suggesting that perhaps analysts are biased towards a bullish stance on gas and expectations of high demand.
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Disclosure: No positions at time of writing.