In the first week of November, natural gas prices recorded their fourth losing monthly streak in a row, the longest in over four years. The leveraged fund VelocityShares 3X Long Natural Gas ETN (NYSEARCA:UGAZ) is off more than 40% whereas the United States Natural Gas Fund is down 15% in the past month. For October, its 16% decline was the worst monthly loss in almost a year. However, the VelocityShares 3x ‘Inverse’ Natural Gas ETN, is up 55% during the same period.
The scenario
Prices have declined over 18% in the last four months, and don’t seem to find a ground anytime soon. Natural gas futures prices declined sharply in the first week of November and the outlook of abnormally warm weather and rising stockpiles are the key culprits behind the recentcollapse.
El Niño, the popular name for a seasonal warming, throws a jerk into weather across the world. It is going to adversely affect VelocityShares-UGAZ as 50% of all natural gas is consumed in the 5 coldest months, from November through March. However, it is an altogether different scenario this year.
The indications
The stock price of VelocityShares 3X linked to the S&P ‘GSCI Natural Gas’ Index Excess Return opened sharply lower on Friday. VelocityShares 3X has a 52-week low of $2.49 and a 52-week high of $70.65.
Natural gas is trapped between falling demand and growing supplies. Hydraulic fracturing or popularly known as fracking measures have boosted natural gas supplies while oddlywarm weather has lessened demand for the commodity.
All this indicates that the market condition still looks dim. Investors should note that these products are awfully volatile and therefore they are apt only for short-term risky traders. Moreover, the daily rebalancing combined with leverage may prompt these products to deviate considerably from the probable long-term performance.
