Trend: Natural gas prices may have bottomed recently if the demand for the natural gas ETF UNG indicates a viable trend.
Stephen Schork at Seeking Alpha describes why a natural gas ETF (UNG) has steadily climbed in price in the last 15 days. Excerpts below.
Since March the number of shares outstanding in the United States Natural Gas (UNG) exchanged-traded fund have surged 260%, from 37,500 to 98,000. At the same time, interest in the equivalent crude oil ETF, the USO, has dropped 39%, from 157,800 at the end of February to 96,100. Thus, last week equal amounts of bets were being placed on both commodities, whereas two months ago passive investors in energy favored crude oil at a 4:1 margin.
... the flood of money into the UNG has undoubtedly helped to establish a floor in the NYMEX market – regardless of extant weak fundamentals – and is now propelling the market higher. To wit, with natural gas’s strong performance last week, we imagine that will serve to attract even more funds into the UNG, et al.
That makes sense. Given WTI’s [West Texas Intermediate oil] push towards $60 (and beyond), natural gas – regardless of extant weak fundamentals – is cheap. So if you are a passive investor and you want to play the energy trade, then buying gas in our book makes a lot more sense than punting WTI. For instance, since April 27th, the former for July delivery has risen by 12.8%, while the latter has jumped by 24.4%. Nevertheless, this is still one of our favorite trades. That is because WTI relative to gas remains overbought. As we noted in Friday’s issue of The Schork Report, this cross-commodity play broke through support at a nearby trendline last week and is now threatening longer dated support.
Disclosure: We may own shares in the ETF described above.