Scalper1 News
Broad commodities have gone off the deep end on sluggish trends with the energy market rout deserving a special mention. Among the issues wrecking havoc on the energy market, rising supplies and falling demand on global growth worries are primary. In such a situation, the Saudi-led OPEC’s decision of not cutting production and even scrapping the regular production limit to save their market share sent oil and other energy-based commodities into a tailspin. In such a scenario, the only hope for the natural gas market was the Arctic Chills, which gives a fresh lease of life to this commodity every winter. The cold snap boosts electricity demand across the region putting natural gas in focus. In fact, in 2014, the Polar Vortex caused natural gas prices to jump over 50%. As almost 50% of Americans use natural gas for heating purposes, withdrawals in natural gas supplies push up the commodity’s prices. The latest weekly inventory release from the U.S. Energy Department also gives the same cues. Natural gas supplies have seen a bigger than expected decline following the season’s first withdrawal. Stockpiles fell by 53 billion cubic feet (Bcf) for the week ended Nov 27, 2015, higher than the guided range (of a 46-50 Bcf draw). The decrease was also higher than both last year’s drop of 42 Bcf and the 5-year (2010-2014) average decline of 48 Bcf. Still, broad-based energy market worries and the possibility of a warmer weather this winter (due to El Nino) did not let natural gas prices enjoy the drawdown in supplies. Oil lost about 10% since the OPEC meeting. Plus, predictions that warmer weather might go into late December – key heating period also dampened investor mood. Energy commodities have now slipped to a more than six-year low. In fact, January 2016 might not imitate the previous two comparable same months due to a protracted and stronger El Nino, which causes weather disruptions in many regions around the world. The effect of El Nino includes drought in some regions and flooding in others due to abnormal warming of the Pacific Ocean. As per Weather Services International, El Niño is expected to cause below-normal temperatures across the southern Plains and into the Southwest, while above-normal temperatures will likely prevail in the eastern and northern parts of the U.S. This weather pattern would result in lower heating demand in the northern hemisphere this winter. WSI also predicted gas-weighted heating degree days to tally about 3,600, suggesting 10% less demand than the year-ago winter. ETF Impact As a result, an ETF tracking the natural gas futures – T he United States Natural Gas ETF (NYSEARCA: UNG ) – has lost about 45% so far this year and was off 16.4% in the last one month (as of December 8, 2015). So investors can avoid these natural gas ETFs in the near term (see all Energy ETFs here). UNG in Focus Investors seeking direct exposure to natural gas, a key fuel source for power plants, may find UNG an attractive option. It is the most popular ETF, having amassed about $478 million in assets. The product looks to track the changes in percentage terms of the price of natural gas futures contracts that are traded on NYMEX. The fund takes positions in the near month futures contracts on expiry and rolls over to the next month futures contracts. As the prices of the next month futures contracts exceed that of the near month futures contracts (also called “contango”), the fund loses on rolling. Hence, UNG is vulnerable to the prolonged period of contango. At present, the fund holds two contracts namely NYMEX Natural Gas NG Jan16 and ICE Natural Gas LD1 H Jan16. The fund charges 60 bps in fees. iPath Dow Jones-UBS Natural Gas ETN (NYSEARCA: GAZ ) This is an ETN option for natural gas investors. It delivers returns through an unleveraged investment in the natural gas futures contract plus the rate of interest on specified T-Bills. The product follows the Dow Jones-UBS Natural Gas Total Return Sub-Index. The note is less popular with AUM of $4.4 million. It is a high cost choice, charging 75 bps in annual fees. GAZ is down 77% in the year-to-date frame and lost about 33% in the last one month (As of December 8, 2015). United States 12-Month Natural Gas ETF (NYSEARCA: UNL ) This product seeks to spread out exposure across the futures curve in order to mitigate contango, a huge problem in the natural gas ETF market. It is done by tracking the average of the prices of 12 contracts on natural gas traded on the NYMEX, including the near month to expire (except when the near month is within two weeks of expiration) and the contracts for the following 11 months, for a total of 12 consecutive contracts. It has amassed just $12.6 million in its asset base and charges 75 bps in fees per year from investors. UNL is down 32.4% so far this year and was off 8.7% in the last one month. Original Post Scalper1 News
Scalper1 News