Natural Gassssssssss

Natural Gas, and particularly the Natty ETF, $UNG , has gotten a LOT of attention on the stream as of late.  This is mirrored by the extreme volume in that has come into the fund in the past few weeks.  Until May, volume was usually under 10 million shares per day, at which point it started trading in the 10 to 20 million range; in June UNG has steadily traded between 30 million to 70 million shares per day.  And yesterday, June 11th: 96 million shares traded hands.  Something is up.

Natural gas prices, like oil prices, fell off a cliff from the highs of last summer.

And while oil has bounced back, Natty has stayed in the doldrums; the market still seems to be making up its mind on price action in the near term.  Demand for Natural Gas has been killed and there is a glut of supply that grows weekly.  As our own Nelderini pointed out :

nelderini Jun. 02 at 3:35 PM #
Further proof that $OIL and gas still not trading on fundamentals, via @FTAlphaville: $UNG $USO $DXO #nrgtalk

There is almost no question that Natty is super cheap.  Once there is ANY sign of the economy REALLY turning, prices will almost surely spike.

But how does one play this?  As has been pointed out by many on our stream, $UNG is very flawed as a pure Natty play.

courtesy @a_f why etf’s suck major balls – in this case $ung – compare $pny to $ung

This article from @FTAlphaville does a great job of explaining the issues.  One, is the issue of contango destroying capital as the fund rolls forward into the next front month contract.  Another issue is a direct result of the aforementioned volume – simply put, UNG has too much dough.

ETFs [based]on Commodity Futures have a basic design flaw in that they are open-ended fund that invest in assets (Futures) that are close-ended (either due to CFTC regulation or due to lack of liquidity). This is a major contradiction that is at the source of market dysfunctions.

There is so much capital being deployed by UNG into Natural Gas futures contracts, that it has started to have to utilize other methods to mirror the price of Natty – namely with swaps; which are very complex securities and can lead to a divergence between the price action of Natural Gas and the UNG fund.

So what else is out there?  We posed the question to the StockTwits community and got a TON of responses:

A_F @howardlindzon $UNG is the ONLY thing that is driving nat gas (drives itself) regardless nat gas STOCKS r always bttr than cmmdty OR ETF

@howardlindzon … theee NATGAS stock of choice = $HK. faith in floyd.
@howardlindzon Check $wmb $apa $apc $upl $dptr & $kwk for natgas plays
@howardlindzon RE: natgas – $HK
@howardlindzon Nat gas play. looking close at GAS.CA. the canadian $ung a play on nat. gas price & cad/usd
@howardlindzon $SD is another nat gas, not sure if youa re making a list, $ATW is not. its a sea driller
@howardlindzon NG names: $PDO, $VQ, $BRY. No current positions.
@howardlindzon you want nat gas look at marcelus shales own $rexx
@howardlindzon hey what about the engineering plays $eng,$mtrx,$dxpe-hurricanes
And as flawed as $UNG may be, it is still a tradeable security and therefore exists potential to make (or lose) money.  Many of our best traders are making great money with $UNG@anthonybrown brings up a great point:
Hey, @howardlindzon although $UNG is getting the contango talk thrown at it, its cousin $USO is still up 50% in 3 months

As you can see, there are a ton of ways to play Natty.  Check the StockTwits stream.  Our community is full of relevant, real time data and analysis.  We will leave the last word to our resident energy wizard @gregormacdonald:

Despite a trailing wake of lousy supply-demand fundamentals, the recent move down in the USD and the extraordinarily low price of natural gas is bound to attract some trading capital to the XNG–the index of natural gas equities. Equally, I don’t expect any broad political attack on US oil and gas companies until we get into late 2011–so US names should be safe at least through the coming hurricane season and Winter. That said, it’s good to remember the relative safety of Canada. I like an anchor in Encana, and then the US blue-chip XTO, flanked by the smaller cap US based PXD and UPL.  When the time comes, bank your trading profits on the US names back North, over the border in Canada.

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