Thursday’s ETF To Watch: United States Natural Gas Fund (UNG)

by on August 25, 2011 | ETFs Mentioned:

Over the past few trading sessions, energy markets have once again come back into focus. WTI crude has, much like the stock market, come back a little bit in recent trading, and is now over $86/bbl. or roughly $10/bbl. from its lows just a few weeks ago. Meanwhile, in Brent crude trading, many investors are anxiously awaiting the end of Qaddafi’s regime in Libya and the restart of shipments of the country’s light crude oil supplies in order to help bring down the premium that this European benchmark currently enjoys over its North American cousin. Yet, with the conflict in Libya seemingly winding down, and investors waiting for Bernanke’s speech on Friday in order to push crude in one direction or another, many investors will likely focus their attention on the natural gas market for the time being. 

Near month natural gas futures are currently trading just below $4/MMBtu, representing a sharp drop from the $5 level that investors experienced in early June. This has largely been due to robust supplies of the key heating and cooling fuel, as well as lackluster demand, a combination that has helped to keep prices depressed for the better part of summer. This week, investors will look for an increase of underground supplies of roughly 75 bcf from the past week so a smaller increase would likely be beneficial for prices in the short term. However, the supply increase has beaten expectations in three of the last four weeks but, in the one week that was a miss, investors saw supplies increase by just 25 bcf, the lowest in recent memory. This suggests that today’s reading could go either way and a large deviation from expectations could help to rapidly shift prices [see all the Natural Gas ETFs here].

Beyond this key weekly report, many traders will also be keeping an eye on the storm that is brewing in the Atlantic. Many belive that Hurricane Earl will be at least a category three storm when it hits the East Coast later this week, potentially crippling large, heavily populated sections of the country. While the loss of natural gas production isn’t likely to be significant no matter where the storm strikes in this area, a loss of power in major population centers could send demand for the fuel plunging, causing prices to slump in the near term as repair work is done. Thanks to this, traders should look to weather reports today to see if the storm is expected to strengthen, and if the hurricane looks to hit the densely populated corridor between Washington D.C. and New York City in order to possibly signal the short term future of prices [Commodity ETFs: It Takes Two To Contango].

Thanks to these two events, investors should look for the United States Natural Gas Fund (UNG) to be in for a volatile trading day. The fund tracks Natural Gas Futures as represented by the closest to expire contract that is at least two weeks away from expiration. With this focus on the short-term, the product could see more volatility than other, more spread out ETFs since both of the events highlighted above will strike markets within the immediate future. If investors see a large increase in the storage report and if the hurricane looks to hit major population centers, we could see UNG resume its short-term trend lower in Thursday’s trading session. However, if the storm appears destined to make landfall in Long Island or further North, and if supplies of the fuel come in under analyst expectations for the most recent report, traders could see UNG surge during today’s trading session [see Commodity ETF Investing: Five Factors To Consider].

[For more ETFs to watch sign up for our free ETF newsletter.]

Disclosure: No positions at time of writing.