Despite the threat of tighter exchange-traded fund (ETF) regulation on the horizon, the United States Natural Gas (UNG) ETF will reopen to new investment by September 28th. This is despite an August 12th announcement that it would not do so.
This is great news for new investors, but bad news for anyone who bought UNG shares over the last few months at a premium to net asset value. An increased supply of UNG units is likely to make the premium disappear. In fact, UNG might already be lagging its underlying as a result of this announcement. Natural gas is up 8% as of this morning, to about $3.2, while UNG appears about flat.
SEC Filing: At present, UNG’s units are trading at a premium to its net asset value (“NAV”). UNG’s management cannot predict what impact, if any, the resumption of creation activity will have on the price of the UNG units on NYSE Arca. It is possible that the resumption of creation activity, even on a limited basis, could reduce or remove any premium over NAV. Investors are cautioned that paying a premium over the NAV for UNG units can lead to additional losses for the investor in the event that the investor sells such units at a time when the premium is no longer present in the market price.
A further implication of UNG’s potential expansion is that the fund might not be able to manage much more money, since it is already a huge part of the natural gas market’s volume.
Index Universe: A recent Citigroup report, which came out just as USCF was deciding to keep its fund closed, estimated that UNG controlled roughly one-quarter to one-third of trading activity in natural gas futures contracts on ICE and the NYMEX.
Aware of potential liquidity problems, UNG’s latest SEC filing outlines the option for the managers to cancel or reduce their planned expansion. Yet regardless, UNG will probably continue to distort the natural gas market due to its size.
Despite the near-term effects above, the longer-term outlook for natural gas itself could be improving.
Goldman Sachs recently highlighted that natural gas’s storage surplus has fallen in recent weeks, and that natural gas prices remain at extremely low levels. As a result, they are optimistic on natural gas prices post-October as we go into draw-down season for the commodity.
Goldman: “As decline rates are beginning to more visibly impact production with less new supply entering the market, the market has begun to acknowledge the tighter underlying balance, which was a likely catalyst of the rally in natural prices in recent days, albeit to still very depressed levels.”
Accordingly, we maintain our NYMEX natural gas price forecasts of $6/mmBtu and $7.50/mmBtu for the 2009/2010 winter and the 2010 summer, respectively, well above the current forward curve.
(Chart and excerpt via Goldman Sachs, Commodity Watch, Septermber 13th, 2009)