UNG Slides As Tropical Storm Alex Loses Steam

by on June 28, 2010 | ETFs Mentioned:

The first named storm of the 2010 Atlantic hurricane season, tropical storm Alex, appears to be veering away from the center of the Gulf of Mexico and towards the Mexico/Texas border. The latest projections show that the storm is likely to hit somewhere between Northern Mexico and Central Texas with the dead center of the prediction currently located right next to Corpus Christi. The storm appears likely to only make it up to 110 mph winds after losing much of its momentum after traveling over the Yucatan peninsula over the weekend. With 110 mph sustained winds, Alex may sound like a devastating storm. But it would be relatively tame by hurricane standards; this would put the storm at the top of a category two storm on the Saffir/Simpson Scale, which would inflict moderate levels of damage on the coastal areas.

Luckily for many, the storm has shifted away from the heart of America’s offshore oil and gas production which is heavily concentrated off of the coasts of Louisiana and Alabama. This has helped to push the United States Natural Gas Fund (UNG) lower by 3% in Monday trading, as the likelihood of a major supply disruption has been lessened considerably. This plunge came after the fund had surged higher in Friday action as traders feared that the storm could hit the important region and shut off large swaths of gas production for more than a week. However, with the storm’s current path, traders realized that the impact would be minimal and UNG has sunk as a result [see more technical analysis of UNG here].

Sign Of Things To Come

The volatility of UNG as Alex moves towards landfall could shed some light on how energy markets will react to storms in the Gulf this hurricane season. Given the choppy, manic reaction that traders showed UNG and other energy funds given as details of the storm’s path emerged, expect significant volatility for funds in the Oil & Gas ETFdb Category in coming months. Tim Evans, an analyst at Citi Futures Perspectives, wrote in a report that the market’s reaction to Alex was to “ignore the threat for several days, react suddenly…then drop back even before it makes landfall.” Should this trend continue for the rest of the hurricane season–which looks to be more severe than those in recent memory with close to 20 named storms possible–it could make for a volatile summer for UNG.

The popular natural gas fund is down about 20% so far in 2010, but had staged an impressive rally over the past three months, gaining about 15% during that time period. Part of the run-up was attributable to expectations for an active hurricane season that could disrupt supplies in the Gulf [also read Five Drivers Of UNG's Spring Rally]. That’s still a very real possibility, but it seems that investors in UNG will have to wait until at least the second storm of the season for a “natural disaster bump.”

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Disclosure: No positions at time of writing