In case you missed the news, the United States Natural Gas Fund — the exchanged-traded-fund — posted a note to the SEC on Friday saying it planned to restart the issue of creation baskets once again.
The fund originally suspended new issues after the SEC failed to grant it permission for further issuance of new units. Later, the SEC granted permission, but the UNG decided not to pass on those units to the market on fears that would force the fund to breach accountability limits on exchanges, which are increasingly being enforced by the CME and CFTC.
So why the latest turnaround?
As we have pointed out before, without the means to grow in a contango market the fund is forced to shed positions at every roll to account for the incremental cost of the new futures it is forced to buy. Without new funds being invested, this would ultimately see the fund implode. Being about to roll, the UNG is now, however, in a position to open its doors to new money — delaying its implosion, by reinvesting into new futures and also evening out its massive NAV/price deviation.
As Olivier Jakob of Petromatrix explained (our emphasis):
In our note of September 4th we warned that the UNG might turn to issuing new shares after the roll of this week given that it will have to liquidate about 36% of its assets in the roll. Well, the UNG has given notice to the SEC that it will start issuing new shares as of September 28th. The immediate impact is that it will wipe out the premium that the UNG is trading at to the net assets. Investors in the UNG will loose at the flick of a switch the current 16% premium embedded in the share (ie from a current YTD return of -54% the shares will move down to their correct valuation which today would be -70% on a YTD basis).
The UNG will have to sell about 38’000 October contract during the roll. New money needs to be attracted to the Fund to replace the assets that the Fund is loosing during the contango roll…They start to reissue new shares on September 28th which is also the day of the expiry of the October NatGas contract. Trading wise it means that the Oct/Nov contango could still widen during the roll this week but that during October there will be an upside risk to NatGas outright prices as the UNG could come back to the market to buy outright November contracts.
In other words, it has no choice. And while the deviation in its NAV/price may subside for the time being, unless the natural gas market suddenly reverses into massive backwardation there is no way investors will manage to recoup losses in the medium term.
What’s more, the fund itself states there is no longer any predictability to when it feels like being in an issuing cycle and when it doesn’t. As the key par from their statement reads:
Currently, UNG’s management believes that UNG will have the ability, under limited circumstances, to offer Creation Baskets as of the above-referenced date and meet its investment objective. If UNG’s management determines prior to the above referenced date that new circumstances have arisen that will prevent UNG from offering Creation Baskets, it will announce through a Form 8-K such changes in circumstances as soon as practicable.
Even CNBC’s Jim Cramer gets that this issue of predictability is a huge no no for any investor.