The first quarter of 2010 has not been kind to investors in the United States Natural Gas Fund (UNG), which has seen shares repeatedly touch new lows as a medley of still weak demand, surging supplies, and–of course–contango in natural gas futures markets. The fund finished the first quarter down nearly 30%, with the majority of that loss coming last month (see How UNG Lost 20% In March). UNG’s steady slide has been attributable to a number of factors, but chief among these has been stubborn strength in key indicators of natural gas supply. When the Energy Department reported that gas in underground storage increased by 11 billion cubic feet for the week ended March 19, it signaled a premature end to the winter drawdown season, and sent natural gas prices plummeting in the process.
Now it turns out the supply figures (which are a critical input into valuation models) may be a lot less accurate than once believed. “The Energy Information Administration, the statistical unit of the Energy Department, has uncovered a fundamental problem in the way it collects the data from producers across the country—it surveys only large producers and extrapolates its findings across the industry,” writes Carolyn Cui. “That means it doesn’t reflect swings in production from hundreds of smaller producers.” The EIA is planning to make significant changes to the way it collects and reports natural gas inventory levels, a move that could result in major downward revisions to key data points.
The discrepancies between reported inventory data and actual supplies arise primarily from an inability to accurately track increases or decreases in gas supply from smaller producers. Commodity analysts and gas producers have long suspected that the EIA has been overstating domestic natural gas output, a factor some believe has contributed to pushing gas prices to seven year lows. The impact of the changes in reporting system remain to be seen, but some believe the revisions will be material. Gary Long, the director of the monthly gas production data report, notes that some states will see “significant” revisions in production data.
Out-Of-Control Supply Gets Reality Check
In recent years several major discoveries of natural gas reserves have been made, a development that made the string of increases in gas supplies seem more reasonable. But some analysts began to question the government’s numbers when the gap between reported supply and demand widened to upwards of 10%. The EIA reported that natural gas supply rose by about 4% in 2009, despite a 60% decline in gas rigs. Those conflicting numbers strengthened suspicions that supply data was being overstated, and the EIA’s recent revelation confirmed this belief.
Shares of UNG surged in trading on Monday, strengthened in part on hopes that the new and improved reporting methodology will ultimately reveal that natural gas storage in the U.S. is far less than the government had been reported. The fund was up almost 5% in Monday afternoon trading, reclaiming a big chunk of the ground lost in recent weeks. Despite the boost, UNG is still down almost 25% year-to-date, making it one of the worst performers of 2010.
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Disclosure: No positions at time of writing.