FCG First Trust Natural Gas ETF

While the bout of extreme weather across much of the United States may have derailed job growth and snarled air travel, it is certainly helping to boost the outlook for natural gas. The popular heating fuel is used by roughly half of Americans to warm up their homes, and with near-record low temperatures, many were burning far more heat than normal.

After all, here in Chicago, temperatures were approaching 50 below (Fahrenheit) with the wind chill, while much of the rest of the Midwest saw similarly low readings. Weather in the Northeast was also quite chilly, while the so-called ‘polar vortex’ of cold weather pushed many parts of the South below freezing as well (read Beat the Cold Weather with These Hot Sector ETFs).

Due to this, many speculate that natural gas demand soared, as heat was running near non-stop in many homes just to keep temperatures at a decent level. And thanks to this huge level of demand across such a large part of the country, some are looking for supplies to drop by over 300 billion cubic feet, possibly surpassing the previous record of 285 bcf, and crushing last year’s supply reduction of 148 bcf in the same week.

“Traders are focusing on the fact that we’re probably going to see a record storage withdrawal,” said Tom Saal, senior vice president of energy trading at FCStone Latin America LLC in Miami, for a Bloomberg article. “The market’s not ready to give up on winter yet.”

Other Factors

It also doesn’t hurt that many are now forecasting colder-than-normal weather across much of the Midwest and Northeast yet again in the coming days. Though the temperatures aren’t expected to plunge into danger territory again, the round of cold could add to natural gas demand once more and curtail supplies again (see all the Energy ETFs here).

And with all this frigid weather, the longer term outlook for natural gas is improving, with some expecting the storage level at the end of March to be just 1.4 trillion cubic feet. While that is obviously still a lot of natural gas, it would represent a 20% decline from the year ago time frame, suggesting we might see some bullishness in the weeks ahead, especially if extreme conditions remain in place.

ETF Impact

Thanks to this speculation and the hopes for more cold weather, natural gas ETFs soared in Monday trading. The top natural gas ETF, the United States Natural Gas ETF (UNG), jumped by 5.75% on the day, while the more spread out across the futures curve UNL rose by about 3.65% in the session.

Meanwhile, leveraged natural gas ETFs also did quite well on the day, helping to reverse their 2014 trend. In fact, BOIL (the 2x leveraged product) rose by about 10.5% on the day, while the triple leveraged UGAZ zoomed higher by 16.2% in the session (see Understanding Leveraged ETFs).

Bottom Line

If the abnormally cold weather continues, it could really eat into the huge stockpiles of natural gas. These massive supplies have kept prices subdued, but with such heavy usage of the fuel for heating purposes lately, we are likely to see a far smaller supply of natural gas heading into the Spring.

However, keep in mind that supplies are still large—even with a big cut to the stockpile—and that new technologies are making it far easier to pull natural gas from the ground. The bout of higher prices might be good news for producers, such as those found in the natural gas equity ETF FCG, but it might take a while to flow through to their bottom lines (read The Polar Vortex Could Push These Stocks Higher).

So traders might look to a bullish run in natural gas in the days and weeks ahead, though its longer term outlook remains a bit more uncertain. More winter weather in the weeks ahead will certainly help natural gas ETFs heading into the Spring, though huge supplies of the fuel mean that a trend of extreme weather is needed to keep natural gas prices, and ETFs, rising as we move further in 2014.

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PPO-ULT DJ-U NG (BOIL): ETF Research Reports
 
FT-ISE R NAT GA (FCG): ETF Research Reports
 
VEL-3X LNG NG (UGAZ): ETF Research Reports
 
US-NATRL GAS FD (UNG): ETF Research Reports
 
US-12M NATL GAS (UNL): ETF Research Reports
 
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