Blogs & Comment

Natural gas miasma

Levels of natural gas stored underground in the U.S. are noticeably lower than a year ago, leading some investorsto buy into natural-gas exchange traded funds (ETFs) such as the United States Natural Gas (UNG) and Horizons BetaPro NYMEX Natural Gas Bull Plus (HNU) ETFs. Contango in the natural-gas futures marketis also a lot lower, reducing the drag arising from rolling expiring futures intonext month’s higher prices.
The bulls are brave souls to step in front of these steamrollers. The HNU, for example, was trading above $900 (split adjusted basis) at its high point in the spring of 2008; its since sliced all the way down to below $5, for a cumulative decline exceeding 99%.
Of course, trends reverse. And there is some support for gas prices from air conditioners running full tilt during the hot summer. But then there is soaring shale-gas output, as a recent Petroleum Economistarticle warns.
The new extraction technologies for shale gas will boost production in the U.S. from 0.9-billion cubic feet a day (cf/d) this year to 1.7-billion cf/d in 2011, reports the article. Shale-gas fields are expected to more than offset the decline in conventional-gas production and the recent uptick in demand.
A Bank of America Merrill Lynch research report lowered its forecast of next years gas prices to an average $5/m British thermal units (Btu), compared to their earlier forecast of $6/m Btu. It does not see low prices curtailing supply until 2011. Perhaps the UNGand HNUbulls might be OK if they get in and out quick but I wouldnt want to hang around for too long.