Making The Natural Gas Trade Great Again

Surging domestic supply hindered natural gas prices over the past several years, but the commodity has recently been a solid performer. Demand expectations could provide some upside for natural gas and the related exchange traded funds.

The United States Natural Gas UNG, a futures-based product widely used among active and professional traders for natural gas exposure, is up 7.72 percent over the past month.

What Happened

Domestic natural gas inventories are declining, a fundamental factor that could bode well for UNG and the commodity's prices.

“The US natural gas storage inventory deficit that developed last winter has not abated: strong demand from the electric power sector-driven by coal plant retirements and supportive weather-coupled with stronger LNG exports has eaten into the largest production growth in history,” said Markit in a recent note. “The market now faces the prospect of an end-of-season storage balance of 3,400 Bcf-400 Bcf below the five-year average and the lowest end-October level since 2008.”

Why It's Important

Summer isn't over yet, but some traders may be directing their views to the winter demand season and the subsequent outlook for natural gas prices.

“Such a low inventory heading into the winter could spell disaster: if the winter is like the 2013/14 winter, when 3,000 Bcf was withdrawn from storage, then the market will exit March 2019 at 400 Bcf,” said Markit. “Yet, Henry Hub prices remain subdued and have been rangebound between approximately $2.70/MMBtu and $3.00/MMBtu this summer. These prices are in stark contrast to the price run-ups that are normally associated with such deficits, suggesting an apparent lack of concern from market participants.”

Investors looking for an equity-based play on increased natural gas demand may want to consider the Alerian Energy Infrastructure ETF ENFR. ENFR holds a mix of domestic master limited partnerships and U.S. and Canadian midstream energy infrastructure firms. The fund is up more than 3 percent over the past month.

What's Next

“The US natural gas market is entrenched in a deep storage deficit, with virtually no hope of returning inventories to the five-year average before the start of the winter,” according to Markit. “Yet, market participants and therefore prices appear nonplussed.”

Increased demand should boost pipeline activity, an important trait for the volume-driven companies residing in ENFR. That ETF yields over 5 percent.

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