Are Oil ETFs Showing Us the Future of Natural Gas ETFs
There are striking similarities between the stock charts of the US ETF for natural gas (NYSE:UNG) now and where the stock chart for the US ETF for oil (NYSE:USO) was in December-February.
The two charts tell us that despite all the bearish fundamentals for
natural gas in North America (and there are lots!), the time to buy UNG
is very near. The chart for the Canadian natural gas ETFs (GAS-TSX,
HNU-TSX) tells the same story.
In February of this year, when everyone thought oil was going to
stay at $40-$45 per barrel throughout 2009, the ETF for oil in the US,
USO-NYSE, bottomed. Its downward momentum was matched almost exactly
with a rising crescendo of volume from investors. The ultimate low was
still a couple weeks away, but as soon as the volume started to
subside, the ETF tracked higher.
UNG-NYSE and GAS-TSX are now showing signs of going through the same
tell-tale crescendo of volume. This would indicate that investors
believe the natural gas price in North America has bottomed, or is very
There are several bullish fundamental factors for natural gas.
1) The most compelling is that the number of rigs exploring
for natural gas in the US is down 50% from last year at this time, at
700. Industry analysts are predicting a sharp drop in supply resulting
from this. I wrote in an earlier article that oil and gas specialist
Tristone Capital out of Calgary is expecting a 7 bcf/d (billion cubic
feet per day) drop in production in the US by late spring 2010. This
would be a huge drop.
2) Combine this with any increase in industrial demand and the table is set for significantly higher prices.
3) An increasing number of experts are explaining how the real,
all-in, cost of production, including land costs, are $7 - $9 per mcf
(million cubic feet), and twice the price of natural gas right now.
Investors who don’t think this can continue should remember the phrase
“the markets can remain irrational longer than investors can remain
But there are several bearish factors for natural gas prices as well.
1) New shale and tight gas plays in the US and Canada continue to
prove up huge supplies of low cost natural gas, lowering the break-even
price for operators.
- 2) The amount of gas going into storage is almost at record levels
- and the rate of injection increases this year over the 5 year average
is going up, i.e. demand destruction is still outpacing supply
destruction - by an increasingly wide margin. Not by a narrowing
margin. Yet. (This is what the bulls are waiting for - watch natural
gas stocks scream upwards when that dream becomes reality. The market
thought they had a sniff of that yesterday & took natgas stocks
higher, even though the actual number was bearish.)
3) The fast growing, low cost Liquid Natural Gas (LNG) sector is a
wildcard. It could swamp North American shores as a cheap source of
supply or it may miss here completely and end up in Asia or South
Almost all research analysts and the talking heads on business TV
say natural gas prices will continue to go down through August, and
then begin to rebound. How big the rebound is, is where opinions begin
These ETF’s are strange creatures in that stocks inherently track
the future, they track expectations of financial picture 6-9 months
from now. Yet ETFs track indexes that are based solely on current
prices. I think the only way you can see the future in an ETF is by
the volume. And that’s what makes the natural gas ETFs so intriguing
If and when I buy a natural gas ETF, I will buy the GAS:TSX. For my
American audience, if gives you a Canadian dollar denominated security,
which is good if you think the US dollar will continue lower. Second,
I prefer it over the HNU:TSX ETF by Horizons Beta Pro. GAS-TSX has no
leverage, and does not reset itself every day, and I believe it more
accurately tracks the commodity price. Remember that GAS:TSX tracks
the Canadian gas price out of Edmonton, AECO, which can be found at www.ngx.com. It does not track NYMEX.