Update on UNG: Natural Gas finally trading in Backwardation

October 31, 2016 by Matt McCracken

After how many years, I have no idea, natural gas is finally trading in backwardation.  This means the price of contracts expiring far into the future are actually trading at a discount to the spot price (or at least contracts expiring in the near term).  For example, NG Dec '16 is currently trading at 3.234.  While NG Dec '17 is trading at 3.240 which is just slightly in contango but the NG Dec '18 contract is priced at 3.057 - a decent level of backwardation.  This development has been a seemingly eternity in coming.  

This development has 2 ramifications.  First, if the spot price of natural gas stays where it is, the buyer of a Dec' 18 contract should generate a decent little profit.  Second, it may mean that UNG, the United States Natural Gas Fund, an ETF that is perhaps the easiest way for Main St. Investors to gain exposure to natural gas, may actually stop underperforming the underlying commodity by such a remarkable margin.  I wouldn’t count on it, but it might.  Since UNG went public on 4/18/2007, a share has lost 82.7% of its value while the price of its underlying commodity, natural gas, has only declined by 59.3%.  This is a case of tragic performance dispersion.  Imagine if an SPX index fund underperformed by such a terrific margin? 

This development should help UNG but in all honestly, it still is unlikely to solve all its woes.  UNG is being systematically destroyed by front-runners and this likely will not change in the near term.  UNL should fair better but is not as liquid.