UNG: Natural Gas ETF
Posted by Frugal on July 24th, 2007
After USO for crude oil, there is another energy commodity ETF for natural gas. It’s UNG. Like most of other commodity ETF, it starts falling right after debut. And it has fallen big too, down about 30% from the height. Given the recent price history of natural gas, it could fall to $4 from the current $6 (price is for the futures market, rather than UNG itself). That’s another 33% potential drop. But for sure it cannot go down to zero, unless you don’t need to pay any natural gas bill.
The advantage of diversifying into pure commodity plays is that while commodity producers are influenced by all kinds of stock market related factors, commodity itself is less swung by the up and down of the stock markets. Rather it is determined by the economics of the supply and demand. The supposed un-correlation should serve a good complement to a portfolio reducing the overall volatility.
To invest in natural gas, one can invest in UNG directly, and/or natural gas companies such as XTO, CHK, BTU, etc. I already own CHK and BTU, but XTO has been a much better performer. I have always wanted to buy XTO, but when I occasionally do remember to check its stock price, the price has never seemed right to me.
As the demand for energy goes up, I expect rotation of rising prices among all energy sources. It’s really the relative economics of different energy that matters. If crude oil prices go up too high, people will shift to other energy sources whenever and wherever it’s viable to do so. There are plenty of choices such as natural gas, nuclear energy, coal, or any other alternative energy. One should asset-allocating for different energies components, and possibly rotate through different forms of energy investment.
At the price of $6 natural gas, and $74 crude oil, it may make sense to re-balance the stakes between natural gas and crude oil bets.
By the way, UNG like USO is an ETF that employ futures contract, and is subjected to price manipulation around expiration dates. Excessive cost in rolling over the contracts will eat into the performance of the ETF. USO is probably the best example in how your pocket can be emptied even when you’re right. The crude oil price is roughly the same around $72 to $75 in May 2006 and now. But some manipulators have managed to empty USO by 20% in a little bit more than 1 year timeframe from $70 down to $56. Now if that is not manipulation, I don’t know what that is. Is that a “random walk”? Shouldn’t the average of contango and backwardation be zero? I’m sure you’ve read the story on Amaranth’s 6 billion hedge fund blowup. But probably less people paid attention to who pocketed their money.
Anyway, for the above reason, I would definitely not put my money into USO or UNG for the long haul. But as a trading vehicle, it should be fine.
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October 30th, 2007 at 4:26 pm
“Shouldn’t the average of contango and backwardation be zero”
I’m not very experienced with such things, but based on what
reading I have done, the answer to the question, “when will
you have contango versus when will you have bakcwardation” is
not a “random flip of a coin” but related to other conditions (for one possible condition see quote below)
Given that, it is possible that the conditions in the real
world are such that you have long periods of either mostly
contango or I suppose of the reverse.
In the quote below they are comparing UCR and USO, but the issue
is not what they say about UCR, but rather what they say the reasons
are for USO’s bad performance:
Theoretically, UCR should trade close to $69 — the price of crude
oil on Thursday. But the funds have premiums and discounts similar to
closed-end funds. As of Thursday, UCR traded at $75.60 — 8.85% above
its net asset value. And DCR traded at $45.44 — 12.72% less than its
NAV.
Why? First, it’s because of a greater demand for UCR than DCR. Second,
unlike other oil ETFs such as the United States Oil Fund, (USO) UCR
and DCR have reduced the cost damage of contango. That’s when the next
month’s contract costs more than the current month’s, taking a loss
every time it rolls from one month to the next.
“In the current market, that’s a painful proposition, thanks in part
to a pipeline-storage issue in Oklahoma, where the oil promised under
these futures contracts gets delivered,” said Matt Hougan, editor of
IndexUniverse.com. “No one wants to take delivery of crude right now
in Oklahoma, so the current month futures contract is artificially
depressed.
…
Because of the contango factor, USO’s price has failed to rise while
the cost of crude has climbed 13% this year.
http://www.investors.com/editorial/IBDArticles.asp?artsec=28&issue=20070621
so they are saying very concrete factors (oklahoma , pipeline storage,
etc above) were behind the longterm contango..more recently
backwardation finally and USO has outperformed other price of oil
trackers..
S
March 29th, 2008 at 1:27 pm
This ETF sends you a K-1 — my account profited by $400, but the income I have to report is on $900. Either I don’t understand it, or you get taxed on income that never gets into your pocket. I think it’s the income of the business or trading fund, and since your a partner, you report the fund’s income, not your own. Be careful with this ETF.
March 30th, 2008 at 5:45 am
I just purchased this ETF so I may have to worry about this for the 2008 tax season a year from now. However I’m already in this boat for 2007 with USO and DBO. The strange thing is they are in my IRA account, which I would think it not taxable, so I’d need to re-read things more carefully than first glance.
No other mutual fund or EFT in my IRA sent me any “Tax information” but USO and DBO did.
Anyone have solid tax background on these partnerships and the status if you hold one in your IRA as an ETF? Thanks in advance,
S
April 16th, 2008 at 12:56 pm
I had DBV in 07 (since sold) – now I have USO in my IRA.
Basically, if the Unrelated Business Income Tax is over $1000 on these, then you owe taxes – but the catch is the taxes have to be paid from your IRA funds.
It’s all pretty flaky. I might consider avoiding these limited partnership ETFs completely (taxable and non-taxable accounts)in the future. Here’s a good article about the subject:
http://www.fool.com/taxes/2000/taxes000908.htm
April 16th, 2008 at 8:12 pm
Thank you very much for the link. I’ll have to double check but I don’t think I’m anywhere near $1,000,…my entire investment is only a few thousand, for each of several. I imagine the limit is for each one so if you have under $1000 for DBO and under $1000 for USO, you’re fine. Income taxes wouldn’t kill me either, just the hassle and new complication. I’m mostly intersted in long term appreciation, which I believe does not count as such “income” only the partnerships operating profit (times your fraction of the total ownership) does..
So I’m not jumping ship yet ,but if I buy others, I might buy OIL the ETN, instead of USO in the future..
\http://seekingalpha.com/article/13750-barclays-files-for-exchange-traded-note-for-oil-how-it-differs-from-the-etf
thanks again
November 9th, 2009 at 8:48 pm
Nice pick buddy… UNG is down to practically nothing!!! So you were a millionaire at 33, are you broke now yet?
November 10th, 2009 at 7:06 pm
Paul,
I’ll let him answer directly if he so wishes, and I can’t speak for him.
Here is a quiz, as a way of sharing with humor to explain (event hough I don’t agree with everything on his blog) why I’ve invested in UNG too.
1. Warren Buffett just made the biggest investment of his life (in a railroad company) because they will likely be more competitive versus trucks because of higher fuel costs, which will be higher in large part because of ______.
2. Gasoline prices and crude oil will (long term) go higher because of global ______ in oil, which we already have reached or else will very soon (under 5 years)
3. Natural gas has not reached _____ globally but in north america NG has indeed already reached _____ and thus long term, NG prices (including UNG) should go up.
The answer to all of the above is Hubbert’s Peak (try wikipedia for a start) Two different observations:
a. When people deny that the burning of 80,000,000 barrels of oil per day, plus coal and much else, is causing climate destabilization, they are either uninformed, or blinded by ideology, or both, and it’s going to be disasterous consequences for our children and indeed for ourselves this half century, if the denial continues
b. When people deny Peak (Hubbert’s peak) for oil and other resources, they are either uninformed, or blinded by ideology, or both, and it’s tragic what the consequences for our children and indeed for ourselves in the next tenth to quarter century, if the denial continues, but also, additionally, those who deny b. also allow those of us with our eyes open to make some nice money. So if you want, join those who deny it and help keep UNG (as well as USO and OIL and others) cheaper than they might otherwise be,for a bit longer, allowing us to buy more shares on the cheap, relatively speaking, because the inevitable happens.
November 10th, 2009 at 7:08 pm
That should say “before the inevitable happens”