Natural Gas ETF Anomaly - Time to Exploit?

[6/17/2009 | 0 COMMENTS HERE ]

After briefly catching Cramer's rant tonight against the Natural Gas ETF UNG and its potential to manipulate the true price of natural gas upwards given unplanned investor inflows, I figured I'd investigate a bit further to see if he was on to something. While he was railing against the existence of the ETF and was calling for the SEC to shut it down, I figured, "hey, sounds like a possible investment opportunity to me". If anything, I'm seeking to hedge energy prices on a personal basis, and there are some other factors at play here above and beyond pure speculation. Not only does this other article from the Wall Street Journal make the case for a potential divergence from the underlying value of the natural gas assets, but this situation opened my eyes to the massive divergence between the trend in natural gas (plummeting) concurrent with oil's ascension. I realize there's never a perfect correlation here given different markets, supply/demand dynamics, etc., but historically, there isn't normally a virtual zero correlation like this.

Check out what the natural gas ETF UNG has down over the 3 month period ended Jun12 compared to oil - Oil up 50% vs. a LOSS for natural gas:

Now, look at UNG shares compared to USO in just the past week. Natural Gas is up 13% vs. a flat oil return. Looks like investors have caught on to the potential gravy train here.

Here are some excerpts from the Wall Street Journal article:

"With investors betting on rising gas prices, assets in U.S. Natural Gas Fund recently swelled to almost $3.7 billion from about $670 million in February, even sparking fears it could be disrupting the futures market."... "Securities and Exchange Commission filings show managers want to increase the number of shares available nearly tenfold. But such requests can take weeks and there isn't any telling when the SEC will act.
If the fund can't issue enough shares to meet investor demand, its shares could begin trading at prices higher than the underlying value of their holdings, breaking a key promise ETFs make to investors and possibly influencing prices in the natural-gas futures markets."...

In anticipation of an expansion of shares, there may actually be near term shareholder dilution; but that may be offset by the increased price in the underlying natural gas futures, as well as the fundamentals and reversion to the mean -with the economy starting to recover, the US Dollar unlikely to rebound, future inflation expectations and this regulatory anomaly, UNG and your personal expenditures for natural gas alike could soar.