The United States Natural Gas Fund (UNG) has been one of the most closely-monitored ETFs in recent months, as investors have followed the regulatory battle unfolding over commodity funds. The Commodity Futures Trading Commission (CFTC) is widely expected to establish positions limits later this year, potentially limiting the size of existing funds and perhaps forcing larger funds to reduce their holdings in futures contracts. In the latest twist in this saga, UNG said Tuesday in an SEC filing that it could put “potentially all of its investments” in gas-related products other than futures, sending its shares tumbling.
Although UNG’s filing indicated that the fund expects futures to remain its primary investment, the thought of the $4 billion fund liquidating its entire position sent jitters through the market. UNG is scheduled to begin its “roll” on Wednesday, selling November futures contracts and picking up second month futures. UNG’s filing noted:
Due to current and anticipated new regulatory restrictions and limitations that have been and may be imposed…UNG may need to invest a larger portion, or potentially all, of its investments in Other Natural Gas-Related Investments in order to continue to meet its investment objective and comply with these regulatory changes.
UNG’s filing goes on to note that investments in other natural gas products, such as over-the-counter swaps, can face significant liquidity restraints and credit risks. In previous months, as its premium to net asset value swelled, UNG has pursued various swap contracts that would allow it to expand further without increasing the size of its futures position. UNG tumbled 4.3% on Tuesday, while the iPath Dow Jones-UBS Natural Gas Total Return ETN (GAZ) lost about 3%.
Fundamental Factors
In addition to concerns over the future of the futures market, investors in UNG have experienced strong headwinds from Expectations for more mild weather across most of the U.S. has also driven down natural gas prices recently. The National Weather Service is expecting warmer-than-normal temperatures in the Midwest in coming weeks.
Huge discoveries of natural gas reserves in recent years and the development of new technologies have contributed to a record high storage level. U.S. natural gas storage recently stood at 3.658 trillion cubic feet, within striking distance of the peak storage capacity of 3.889 trillion cubic feet estimated by the Energy Information Administration.
Despite supply levels at all time highs, Royal Dutch Shell has begun work on the world’s first operational floating liquefied natural gas platform in waters off of Australia. The $5 billion plant would have the capacity to produce 3.5 million tons of liquefied natural gas a year, more than just a drop in the global supply bucket. While natural gas is generally not transported around the world like crude oil, Shell’s project focuses on producing liquefied natural gas, which is super-cooled to liquid form so it can be transported by ship.
UNG has attracted more than $3 billion in cash inflows so far in 2009, during which time the fund has lost more than 50% of its value.