We noted on Monday to what degree the United States Oil Fund (USO) ETF had reduced its positions in WTI front-month futures since February and how that has coincided with a not disproportionate build-up in positions of the United States Natural Gas fund (UNG), another ETF in the same group of funds.
It’s worth remembering here that the USO’s stellar rise back in February to a size where it commanded some 20 per cent of the WTI futures market generated speculation the fund was having an inordinate amount of influence on the front end of the futures curve. This was especially the case since its monthly rollover was extremely predictable and took place all on one day. Following some possible SEC pressure, as reported here, the fund did end up changing its methodology to roll over a number of days instead.
Nevertheless the build-up of the UNG, which already rolls over four days, is now leading to some fresh accusations of inordinate influence — this time in a much smaller market at that.
As Olivier Jakob at Petromatrix comments below, the fund now controls 80 per cent of the open interest in the front-month Nymex natgas futures contract, if you account for its June swaps position too:
Early in the year, the super contango was for a big part the result of the extravagance of the United States Oil Fund ETF (USO) but their positions have been trimmed closer to the Nymex accountability level and they are now less a factor in the crude oil spread.
The managers of the USO are also running the United States Natural Gas Fund (UNG) and the recent position increases in that ETF are as troubling as what they did on WTI in the first two months of the year. Positions in the UNG have grown 4.5 times since the end of March and the positions held in the UNG could represent as much as 80% of the June Nymex NatGas Open Interest. The four day roll of the ETF starts tomorrow and to avoid the risk of being hanged by the UNG we would already move any NatGas length from June to July. The positions in the UNG are more than 7 times what would be the Nymex accountability limit, the problem is however that they holding the majority of the position in “swaps” rather than Futures.
We do not know the exact nature of those “swaps” and whether they are a swap on the Futures or a monthly pricing swap. The latter would have less of rolling impact than the former but we will assume the former for risk assessment, especially since we sincerely doubt that whoever sold those swaps to the UNG is a charitable organization.
Meanwhile, Stephen Schork of the Schork Report — the first to highlight the parallel –comments as follows:
We got a lot of feedback from yesterday’s note regarding the interest in the natural gas complex by passive investors and the positive knock-on to the NYMEX Henry Hub price path. Growth in outstanding shares in the United States Natural Gas (UNG) exchanged-traded fund (ETF) have surged over the last few months while interest in the equivalent crude oil ETF, the USO, has waned.
We have no doubt that the flood of money into the UNG established a floor in the NYMEX market — regardless of extant weak fundamentals — and is now propelling the market higher. We repeat, regardless of weak fundamentals this market has surged 32% from its April 30th low.
Schork goes on to point out that while natgas futures could certainly be perceived as a good buying opportunity, especially considering the recent coverage of falling natgas rig counts, retail investors may be overlooking one thing:
The typically rule-of-thumb is a three-month lag between rig cuts and production. In this vein, after peaking at 1,606 at the end of August, the BHI gas count has dropped in 32 out of 36 weeks, the last 24 in-a-row. Thus, rigs have been dropping precipitously, 24 rigs per week, for the last nine months. Yet, gas production has been rising steadily. Since the GoM shut-ins in the fall from Gustav/Ike, overall gas production has been rising on average by 1.41 Bcf/d (+2.4%).
In other words, higher yielding non-conventional plays (tight, coalbed, shale gas) and gains in rig efficiency are offsetting what would be a traditional rig-count to production-loss event. We supremely doubt most buyers of the UNG are aware of this.
Furthermore, it’s also worth remembering he says that increased production also comes in the context of lagging industrial demand for gas. Nevertheless, Schork does conclude he himself likes the idea of owning natural gas — albeit only as long as you’re selling crude oil against it for the time being.
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An update from Wednesday May 13th:
For those confused about the 80 per cent figure, Olivier Jakob at Petromatrix breaks down the exact size of the UNG’s position as follows:
Given the size of the UNG and the fact that it is starting to roll today we will shy away from NatGas. The UNG currently holds 23% of the June Futures Open Interest and 34% of the Henry Hub swaps (NN) Open Interest.
Together those figures account for some 80 per cent of the front-month futures contract.
Related links:
Commodity ETF investors move significantly into natural gas - FT Alphaville
Super-natural gas - FT Alphaville
Anything but therm in the US - FT Alphaville
A self propelled pyramid? -FT Alphaville
