What's the latest craze? The iPhone? Kindle? A super-lightweight notebook pc? All of the above are eye-openers. But one could argue that the biggest craze is the natural gas exchanged-traded fund, the United States Natural Gas Fund (NYSE: UNG).
The fund essentially is a low-cost way for the typical investor to invest in commodities, but if you haven't bought any shares of UNG yet, don't. Here's why:
First, the energy market, intrinsically volatile, is going through a major tug-of-war between the institutional bulls (who argue the U.S. and global recoveries are up ahead) and bears (who argue the recovery will be delayed, dampening energy demand, including natural gas demand).
Second, the Commodity Futures Trading Commission has announced that it may limit holdings of energy futures by traders, including index and exchange traded funds, amid concerns that speculators are "artificially" boosting the price of energy commodities -- particularly oil -- above what supply and demand fundamentals would dictate.
Further, UNG has fallen substantially during the past year as the price of natural gas has fallen over the past year: UNG traded above $55 in July 2008 but had fallen to $12.30 as of Friday's close.
Potential new reserves of natural gas
Finally, there are objective events in the natural gas market that could substantially add to the U.S.'s natural gas supply in the next year – driving the price of natural gas, and by extension UNG's price, even lower. Chief among these is an estimated U.S. natural gas reserve increase of 35%, due to new drilling technologies that are unlocking large amounts of natural gas from shale rocks, according to a new study by the Potential Gas Committee, The New York Times reported. Much of the reserve increase stems from the tech-based ability to obtain natural gas from shale rocks, which companies only recently discovered how to do, in a process called hydraulic fracturing.
If all of that extra natural gas is able to be tapped, estimated U.S. natural gas reserves would total 2,074 trillion cubic feet in 2008, up from 1,532 trillion cubic feet in 2006, when the last report was issued.
Energy Analysis: To be sure, natural gas demand, and hence its price and the price of UNG, could be headed higher, if the right conditions line up. Natural gas may end up playing a large role in the nation's energy future (homes, businesses, electric power generation, even civilian vehicles), but there are too many unresolved issues at present to be bullish on natural gas. Hence, now is not the time to "go long'"on natural gas or with UNG. If and when the natural gas segment turns bullish, I'll send out a Buy rating, as they say, in a New York minute.
Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
First, the energy market, intrinsically volatile, is going through a major tug-of-war between the institutional bulls (who argue the U.S. and global recoveries are up ahead) and bears (who argue the recovery will be delayed, dampening energy demand, including natural gas demand).
Second, the Commodity Futures Trading Commission has announced that it may limit holdings of energy futures by traders, including index and exchange traded funds, amid concerns that speculators are "artificially" boosting the price of energy commodities -- particularly oil -- above what supply and demand fundamentals would dictate.
Further, UNG has fallen substantially during the past year as the price of natural gas has fallen over the past year: UNG traded above $55 in July 2008 but had fallen to $12.30 as of Friday's close.
Potential new reserves of natural gas
Finally, there are objective events in the natural gas market that could substantially add to the U.S.'s natural gas supply in the next year – driving the price of natural gas, and by extension UNG's price, even lower. Chief among these is an estimated U.S. natural gas reserve increase of 35%, due to new drilling technologies that are unlocking large amounts of natural gas from shale rocks, according to a new study by the Potential Gas Committee, The New York Times reported. Much of the reserve increase stems from the tech-based ability to obtain natural gas from shale rocks, which companies only recently discovered how to do, in a process called hydraulic fracturing.
If all of that extra natural gas is able to be tapped, estimated U.S. natural gas reserves would total 2,074 trillion cubic feet in 2008, up from 1,532 trillion cubic feet in 2006, when the last report was issued.
Energy Analysis: To be sure, natural gas demand, and hence its price and the price of UNG, could be headed higher, if the right conditions line up. Natural gas may end up playing a large role in the nation's energy future (homes, businesses, electric power generation, even civilian vehicles), but there are too many unresolved issues at present to be bullish on natural gas. Hence, now is not the time to "go long'"on natural gas or with UNG. If and when the natural gas segment turns bullish, I'll send out a Buy rating, as they say, in a New York minute.
Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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Reader Comments (Page 1 of 1)
7-13-2009 @ 10:21PM
theinflationist said...
I cannot disagree more with you.
Quote: "Further, UNG has fallen substantially during the past year as the price of natural gas has fallen over the past year: UNG traded above $55 in July 2008 but had fallen to $12.30 as of Friday's close." It IS exactly this reason (ie price have fallen off the cliff) investors should invest in natural gas - never buy something when its all time high.
Shale gas has a cost of production in the vicinity of $5-6/mbtu. NG price is currently $3.30. Corrected for inflation, this is equivalent of $2 in the 80s. conventional gas production costs are about 3-4/mbtu (ie at current prices, producers would break even).
the only cure to low price is low price. with all the infrastructure in place, gas is not going to be irrelevant in the near future. and we do not need the bill for gas vehicles etc to pass to lift prices up again.
the record low price is a great opportunity for investors.
check out
http://theinflationist.com/stocks/natural-gas-be-greedy.
Im sorry mr lazzaro, i just dont see your point.