NATURAL GAS
Natural Gas vs Oil Rig Count No. of rigs, weekly, from Nov 9, 2007 to Nov 9, 2012
Gas Rigs Oil Rigs
Oil: Natural Gas & Coal – Natural Gas Ratios Times, Daily, from Nov 14, 2007 to Nov 14, 2012
WTI Crude : Natural Gas Ratio Coal : Natural Gas Ratio
Sources: Baker Hughes, ETF Securities
reverted to the five-year average, persistently elevated natural gas prices will be necessary to reverse the declining trend in rig counts. In the meantime, the EIA foresees a drop in natural gas production in the coming months due to the low level of operating rigs.
What the Weather Has in Store For the upcoming winter the US Climate Prediction
Centre now considers it less likely that a fully coupled El Niño pattern will develop. However, in its 2012 US winter outlook, the National Oceanic and Atmospheric Administration (NOAA) predicts warmer-than-average temperatures in most of Texas, the Central and Northern Plains, the Southwest, the Northern Rockies, Northern Alaska, Eastern Washington, Oregon and California. At the same time, colder-than-average temperatures are
... futures contracts and ETPs benefit from a more direct exposure to price changes [than equities]
expected in Hawaii and most of Florida. Based on NOAA predictions, the EIA forecasts the US winter 2012-3 heating season to be 2% warmer than the 30-year average but 18% colder than last winter. If those estimates are proved right, it could help support prices over the winter months.
LNG: A Game Changer? The US natural gas market has tended to be relatively
isolated from the rest of the world, with LiquefiedNatural Gas (LNG) imports and exports small on a relative basis compared to the Asian and European markets. The declining trend in US LNG imports in recent years has been mostly driven by increased domestic production, mainly from shale gas. The planned expansion of the Panama Canal due to
be completed in 2014 would allow LNG tankers to pass from the Atlantic to the Asian market. This should help facilitate US natural gas exports to China and Japan, two
of the key global markets, helping to unify global natural gas prices. However, the move to a truly unified global natural gas market is still likely many years off.
Investing in Natural Gas There are many ways investors can gain exposure to
the natural gas market, however deliverability is an issue that limits investors’ accessibility to the spot market. Natural gas equities, futures and ETPs represent potential alternatives to invest in the commodity. While equity markets might not immediately respond to
changes in natural gas prices, futures contracts and ETPs benefit from a more direct exposure to price changes. However, investors should bear in mind that because natural gas is a very seasonal commodity, the shape of the natural gas futures curve can have a significant impact on performance. Over time the natural gas market has tended to have a strong negative roll yield, also called contango, with longer dated futures prices on average tending to be higher than near dated prices. This is an issue all investors in natural gas must contend
with, whether investing directly in the futures market or through ETPs that track futures returns. Short natural gas ETPs naturally tend to benefit from contango, though as with long natural gas ETPs, the movement of the underlying contract price normally, though not always, tends to have a larger impact on total returns than the roll yield. •
Simona Gambarini is a Research Analyst with ETF Securities.
This communication has been provided by ETF Securities (UK)
Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Services Authority (the “FSA”).
This communication is only targeted at qualified investors as such
term is defined in Directive 2010/73/EU and professional investors as such term is defined in Directive 2004/39/EC.
www.etfsecurities.com December 2012 79
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