Last week the number of shares outstanding in the natural gas ETF (UNG) dropped by 3.3%. This decline is interesting given that it occurred as the front two contracts on the Nymex Henry Hub curve slipped back into backwardation. The decline in shares is peculiar given that it now makes sense to own the UNG in order to capture the positive roll.
Be that as it may, despite this enticement, we do not expect to see retail investors rush back into the market anytime soon.
Per the fund’s website, $10,000 invested back at the inception of the fund in February 2008 would only be worth about $1,500 as of the end of last month. Needless to say, despite the assurance of the natural gas permabulls, we can’t blame the little guy for being skeptical regarding the nearby prospects for natural gas riches.
For example, if instead of buying at the inception of the fund you had bought at the bottom of the natural gas market (Sep-2009) then your $10,000 “investment” would be worth around $8,500 today… despite an 83% (!) increase in the price of natural gas.
Thus, without the influx of cash into the front of the curve, chances are good the backwardation will be short-lived. Case in point, we are now one month past the summer solstice; this is historically the hottest part of the summer. Storage builds are currently at the slowest pace in five seasons, yet we have just now slipped into backwardation.
This is similar to the situation last winter when we were at the coldest part of the winter (i.e., the month following the winter solstice). It took one of the coldest Decembers in recent memory to finally push the front of the curve into backwardation. Yet, that backwardation did not even last through the end of February… despite some of the coldest and snowiest Januarys and Februarys ever recorded.
Therefore, what is to prevent a similar situation occurring this time… outside of a hurricane in the Gulf that is? After all, just as we saw in March, weather-related demand will fade.
Thus, without the industrials or the commercials to pick up the slack, analysts at The Schork Reportare projecting that a hurricane is about all the bulls have to hope for.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.