NAT GAS AND UNG WOES
All this UNG CFTC nonsense going on has made for some unusual trading in nat gas and in ung. Where they should be at a 1 to 1 ratio where ung tracks nat gas evenly we have UNG not issuing new shares and the UNG now trades at a premium.Meanwhile nat gas itself has been selling relentlessly and it has led me to wonder whether the market is pricing in a liquidation of UNG and the resulting onslaught of futures contracts that will be up for sale.
This whole situation could resolve itself in many ways including the possibility that the CFTC decideds to do nothing as far as tighter regulation ..which in my view is the way to go. The UNG, USO and others like this are the easiest ways for the average investor to participate in the commodities markets without actually buying futures. Why the CFTC would tell the small guy you cant play in this sandbox is beyond me.
The premium issue is another story and with all the talk of UNG collapsing down to eliminate the differences in price, there is one other possibility. If the CFTC does nothing, and my theory of the recent selling pressure holds, we could see nat gas rally sharply while the UNG basically does nothing until the prices normalize. Right now UNG should be about a dollar or so lower from where it is now. Is nat gas at 2.80 finally at a place where it should turn. Its been down 12 of the last 13 trading days. At some point this is got to end unless nat gas is going to zero.
They never seem to make things easy do they. BTW sorry for the lack of posts yesterday but i had one of those days where my brain was completely fried.
joseph cioffi's Source Page - Associated Content
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More on UNG:
Sponsors of the United States Natural Gas Fund (NYSEArca:UNG - News) took baby steps toward restoring the fund’s ability to issue new shares yesterday.
Related Quotes
Symbol Price Change
UNG 11.35 -0.16
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UNG is an exchange-traded fund that invests in the natural gas futures market. The fund stopped issuing new shares on Aug. 12, citing regulatory uncertainty in the commodities marketplace. The Commodity Futures Trading Commission is investigating the role of ETFs in the commodities market and is expected to announce strict position limits for such funds. Many expect the $4 billion UNG ETF to exceed the allowable limits, as it controls a significant portion of the front-month natural gas futures market.
Since halting the issuance of new shares, UNG has traded at a sharp premium to its underlying net asset value, as demand for the fund has outstripped supply. As of 2:32 p.m. ET, Aug. 21, it was trading at a 16% premium to NAV.
The sponsors of UNG have been looking for ways to maintain exposure to the natural gas market while reducing the number of futures contracts they hold. Yesterday, UNG secured a $500 million total return swap that could help.
Total return swaps are privately negotiated agreements between two parties to exchange cash flows based on the performance of a target index. In this case, UNG entered into an agreement with a bank to exchange cash flows based on the performance of a front-month natural gas futures contract. Because swap contracts are privately negotiated and not linked to any underlying holding, they should not count toward any new CFTC limits.
The $500 million agreement is the second natural gas swap contract negotiated by UNG, joining an earlier deal for $200 million. The deals allow UNG to reduce its positions in natural gas futures while still tracking the performance of the natural gas market.
“We indicated in a recent filing that we are seeking to obtain natural gas-based total return swaps as part of our strategy to reduce our holdings in listed futures contracts,” said John Hyland, manager of UNG. “This is an attempt by UNG to deal with whatever new regulations may be introduced by the CFTC and to allow us to permit creations of new units. Our actions today, and the natural gas-based swap we entered into a few weeks ago, are not enough by themselves to yet allow us to either meet what we think such potential CFTC levels might be, or to permit us to prudently allow new creations. Still, we are making very good progress.”
If UNG can cobble together enough swaps, it could potentially start issuing new shares of the fund again. If that happens, the premium on UNG should collapse back toward zero.
-- This report was submitted by IndexUniverse. com's Matt Hougan.
i am becoming more convinced that nat gas futures are under so much pressure because of the possibility of UNG liquidating. If im right amd this gets resolved we will see futures rally with ung not doing much until the premium comes out.
wishful thinking perhaps but it is a possibility.
Joe. I see UNG's success as being the seed (maybe) to its ultimate failure. In an ideal free market, each participant should be unable to significantly impact the demand/supply of the product; UNG, and some other wildly successful commodity based ETFs, I believe, create a too easy method for speculating, and therefore, influence the prices of the underlying commodities (some believe this occurred last summer with the price of oil, which was a key driver to our current "great recession," and then prices imploded when the "house of cards" fell). I have the same concern for GLD and SLV about creating artificial demand. In order to play commodity based ETFs, I believe one must be quick on the buy/sell trigger, something that you stated earlier that you have been successful at with UNG; congratulations. For me, I am more of a swing trader to long-term investor and, accordingly, will usually stick to more stable dividend paying large- and mid-cap companies, with a small-cap thrown in every now and then (Unlike my usual investment style, I did a lucky buy and sell of UGA last year. It was fun, and I made a few bucks; but, I feel it was mostly good fortune, and will not likely repeat it.). I also like the fact that most MLPs are not significantly impacted by the prices of the critical commodities they transport.
Anyway, I always enjoy reading about your adventures, please keep us informed of your moves.
Thanks,
JCarroll
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