Wednesday, July 22, 2009

UNG Time!

Three charts; 60m, Daily and Weekly with articles and commentary from yours truly.

The links to each chart are above in the time frames.

Let's start with the additional share issue from Seeking Alpha today - Natural Gas ETF Awaits New Shares as Prices Fall. If you just think UNG is a normal ETF, you need to read this. "The $4.6 billion fund made 300 million new shares available May 6, which grew to 347.4 million shares, and ran out on July 7. The Securities and Exchange Commission is deciding whether to approve 1 billion extra shares." That is ONE Billion extra shares with a B.

What are some of the issues facing UNG and natural gas. From the same article, "Stockpiles of the fuel increased 90 billion cubic feet in the week ending on July 10, hitting 2,889 trillion cubic feet, a 15 year high. Demand by factories, steel mills and chemical plants, which make up 29% of U.S. demand, dropped 13% in 2009’s first 4 months year-over-year."

Further issues are discussed in Econbrowser's article Natural gas and oil prices. "Natural gas prices have been pummeled by over-supply and weak demand, cutting the national drill rig count in half in the past year. Meanwhile, monstrous initial production rates in non-traditional shale plays have added to price pressure, as producers fight to hold the terms of their expensive leases in boomtowns....Now, British Columbia's Horn River Basin might be added to the list, with the help of behemoth ExxonMobil (XOM) reportedly coming up with initial rates on early test wells to the tune of 16- to 18-million cubic feet a day.... That is double the rate of a really good well and in line with the Haynesville, in Louisiana, which may hold some 250 trillion cubic feet of recoverable national gas, enough to satisfy domestic demand for a decade."

Want to know what drives the price action in UNG? Contango! "Rolling hurts performance when the current contract is worth less than the next month, known as contango. The natural gas market has been in contango 94 percent of the time since the fund started in April 2007, compared with 78 percent since April 1990. Contango doesn’t matter as much when prices rise. Gas cost $7.50 when the fund debuted and increased 81 percent to a 2 1/2- year peak of $13.58 on July 3, 2008. The fund gained 25 percent during that time, besting the Standard & Poor’s 500 Index, which fell 14 percent."

Bloomberg has Natural Gas ETF Down More Than Fuel as Fund Sells Out (Update2) where you learn, "“The amount of interest in this fund is a surprise given the trend in gas is down and not looking to change any time soon,” said Tom Orr, the director of research for Weeden & Co. LP, a Greenwich, Connecticut, securities brokerage, in a telephone interview. He predicted natural gas, this year’s worst performing major commodity, will fall below $3 per million British thermal units next month, from $3.689 today, and rise to $4 in the fourth quarter."

I did not discuss the relationship between the price of oil and nat gas (it is covered in detail in the Econobrowser article). You should read it. Bottom line is the relationship ratio is not at historical norms that will require the prices to become closer in relation to each other. Given my Oil Up Or Down post below, I believe the price of oil falling will take care of the majority of this correction much more than nat gas rising.

So all of you who think UNG is a bargain and do not understand what is happening behind the ETF should be pretty surprised right now. The price is in contango now. This means there is no fundamental reason for the ETF to be rising other than speculation. There is no demand. Rigs are shut down. There is a serious supply glut. Shall I continue? Why is there demand for a Billion new shares? I can't tell you. Maybe it has something to do with Cap and Trade and the fact that nat gas is more environmentally friendly and cheaper than oil.

Lets get to the chart - I chose the 60m because it gives the best near term picture of what is going on. There was a nice triangle that has developed into a falling wedge. I do believe this is part of the bottoming process. I am going to stick with my thoughts that UNG is forming an MA pattern as mentioned before in previous UNG posts. The rising wedge in red should generate a bull flag and alter the shape of the rist to another wedge that will lead to the end of the rise.

I had previously (now deleted) had the triangle breaking down to 9.50 (width of the trianle from the breakdown point). I am not ruling out the possibility of a backtest of the triangle BD line and then a move lower. I missed the small H&S formation at the bottom and was way to bearish on UNG. The indicators turned on me unexpectedly and I missed it. This is why I am laying out all the scenarios I can see.

The annotations are in the chart. Based on the indicators I expect near term trend to continue. The 60m indicators are topping out and setting nice negative divergences. They will embed as the dailys are still in bull mode. The weeklys look strong as well. Actually UNG is set up a lot like SPX had been about a week ago. Look for the dailys to top out and set nice divergences on the weeklys for the nexy fall to what I think will be a lower low.

If UNG takes out the upper wedge line I would be surprised given the fibs, triangle apex, resistance and trendlines. Then again, greed and speculation might allow it to grow to a double top near 16.25, but I do not see it. I do expect another touch of the lower blue trendline for a possible ultimate bottom, but given my beliefs in the prospect for a continued depression (is is no longer a recession IMO) then demand for nat gas should remain low and supplies high. Not a great environment for growth. Oh, and I would think hard about dilution if a Billion additional shares are released, that might effect price just a little bit.

I hope this helps. GL trading.


  1. UNG ( and USO ) has inadvertently become a bit of a lone crusader in the mission to expose the influence of ETF's on commodity markets. In the UNG's case, however, the growth has been so large that in order to avoid a regulatory clampdown on its futures positions the fund managers have been forced into the world of over-the-counter swaps. Accordingly, the funds swap positions are now 2.6 times larger than its future ones.

    For example, in last week's roll ( the dates of which are publicly announced by the Fund; believe it or not ) , UNG had over 100k to roll, 27k contracts in futures and the rest between swaps and OTC. They lost over $100 million dollars just last week from doing their roll. Meanwhile, I'm sure that lots of professional traders made some nice coin while "front-running" the August/Sept contract which expanded from -0.12 to -0.155 the first day of the UNG roll. Similarly, over the course of the four-day roll, the July/August spread shrank 4.3 cents.

    If the Fund ws to put all that money into the futures market, it would be equal to occuping 78% of open interest in the July Nymex contract. Meanwhile, the holding of large swap positions goes against the Fund's mandate as outlined in its prospectus.

    As a result, the UNG becomes a "Ponzi" scheme for the average investor and a nice big tuna of an opportunity for energy futures traders!

  2. Wags - that may be the most in tune post I have ever had posted here. So she briefly came out of contango and then went right back in. Hitting that window of opportunity is a daunting taks. Was it just luck? Thus the need for the BILLION new shares as float or liquidity for the big boys to play. Thus allowing room for further "speculation". Question is where do they want to take it?

  3. shank

    I like your vix daily chart
    was going to past link here, but your blog will not allow it.

    Looks like we should get a turn any day now.



Keep it civil and respectful to others.