Natural gas prices affected by ETF

Energy traders at the Merc (AP Photo/Yanina Manolova)

The Wall Street Journal put together an interesting report on natural gas yesterday. The respected financial daily reported that the inability of the U.S. Natural Gas Fund to receive regulatory approval to issue new shares has prevented the fund from purchasing new contracts, which the Journal said has weighed on gas prices.

Prices on Thursday moved higher after the Energy Information Administration reported a smaller-than-forecast build in gas inventories, but the report is the latest blaming speculators for the volatility in energy prices.

Quick primer on the natural gas market

The price of natural gas is mostly driven by weather.  Supplies start building around April when temperatures warm and peak in November when colder temperatures spread across the country. 

Variations from the norm, i.e., cold winter weather, can more quickly draw down inventories, or mild temperatures in the summer may speed up injections.  According the the EIA, about 20% of electricity in the US is generated from natural gas.

Weak industrial demand can also have an impact, while hurricanes in the Gulf of Mexico may shut in production.  Thus far, it's been a quiet hurricane season. Let's hope that pattern continues.

We've had mild temperatures across much of the US this summer, reducing air-conditioning needs, while the weak economy has cut industrial demand. Consequently, it should not come as a surprise that the EIA said supplies are 19% above the five-year average for this time of year, accounting for much of the price weakness. 

UNG in focus

But, as the Journal reported, the UNG fund has attracted almost $4 billion in net cash since March and has grown about six times in size. In late-June, Citigroup analysts wrote a research note saying that the fund accounted for "roughly one-quarter to one-third of Nymex and ICE open interest," which could be "propping up" front-month prices for natural gas.

This comes on top of last week's story that the Commodity Futures Trading Commission is looking at limiting speculative positions in energy products.

Prices should be set by producers who supply a commodity and consumers who demand that commodity.  Futures contracts also play a vital role by allowing producers and utilities to hedge.

Speculators can add liquidity by betting on rising or falling prices, but when new financial products open the market to billions of new dollars and increase volatility to the detriment of consumers and the economy, actions may be needed to mitigate the impact.

 For more info : Please see Tomorrow's Economy Today. A look at June's solid rise in housing starts is also available.

If you enjoyed the above article, please see The price of oil and speculators - secondhand smoke of the economy.