Natural Gas Futures Plunge Due to Milder Weather and Reduced LNG Exports | ETFs to Watch

Reduced Feedgas to LNG Export Plants

Gas flows to U.S. LNG export facilities fell to 11.6 bcfd in July, down from 12.8 bcfd in June. This decrease is mainly due to the extended shutdown of Freeport LNG and operational cuts at Cheniere Energy's Corpus Christi plant. Freeport LNG has been offline longer than expected due to Hurricane Beryl, delaying seven to ten shipments. Although one processing unit is set to restart this week, others will resume at reduced capacity.

EIA Storage Report Insights

The EIA reported that U.S. utilities added only 10 billion cubic feet (Bcf) of gas into storage last week, significantly below the anticipated 28 Bcf increase. This brings total stockpiles to 3,209 Bcf, 16.9% above the five-year average. The smaller-than-expected storage increase has also influenced the price decline.

Short-term Natural Gas Outlook

The EIA estimates the Henry Hub natural gas spot price to average $2.90/MMBtu in the second half of 2024, up from $2.10/MMBtu in the first half. U.S. dry natural gas production is projected to decrease slightly due to reduced drilling and production curtailments. Natural gas storage injections are expected to fall below the five-year average, reducing the storage surplus. Prices are anticipated to rise to $3.30/MMBtu in 2025, driven by new demand from LNG export projects.

AI Data Centers and the Bullish Outlook for Natural Gas

Oilfield expert David Messler recently emphasized in an article on oilprice.com that AI data centers could generate fresh demand for natural gas, potentially benefiting the market and undervalued gas-focused E&P stocks. Messler pointed out that the surge in energy consumption by AI operations, particularly during the training and inference stages of AI models, is driving this trend.

He discussed Jevon's Paradox, which suggests that improvements in energy efficiency within AI technology will likely increase overall energy consumption rather than decrease it. Messler noted that, as a result, natural gas stands to gain substantially, given the declining preference for coal and the inability of new nuclear power plants to meet immediate energy needs. He concluded that this emerging demand from AI could significantly boost the prospects for natural gas through the end of the decade.

Natural Gas ETFs to Watch

Despite its price volatility, natural gas offers a cleaner burning option in the fossil fuel sector with potential for growth. Rising demand as a transitional fuel and price fluctuations present opportunities for investors seeking higher returns or portfolio diversification. However, careful research remains crucial.

Here are Natural Gas ETFs to consider:

The United States 12 Month Natural Gas Fund LP

and the United States Natural Gas Fund LP

UNG

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are both exchange-traded funds (ETFs) that provide exposure to natural gas prices, but they employ different strategies and have distinct characteristics.

UNL invests in natural gas futures contracts spread evenly across the next 12 months, which helps to mitigate the impact of short-term price volatility and contango effects. This results in a more stable performance relative to the front-month contracts. UNL has a lower expense ratio of 0.90% and tends to be less volatile and less risky compared to UNG.

UNG, on the other hand, focuses on the front-month natural gas futures contracts, which are the nearest contracts to expire. This approach can lead to higher volatility and greater susceptibility to the negative effects of contango, where the futures prices are higher than the spot prices. UNG has a higher expense ratio of 1.33% and has historically experienced larger drawdowns and more significant underperformance compared to UNL.

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Another ETF to consider is the First Trust Natural Gas ETF

. Unlike UNG and UNL, FCG invests in equities (no direct exposure to the natural gas commodity) and aims to track the performance of the ISE-Revere Natural Gas™ Index.

It focuses on mid and large-capitalization companies that derive a substantial portion of their revenue from the exploration and production of natural gas, as well as from midstream activities. FCG provides investors with exposure to the natural gas industry through a diversified portfolio of stocks, primarily in the U.S. energy sector. With an expense ratio of 0.60%, this ETF offers a way for investors to participate in the natural gas market without directly investing in commodities or individual companies.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.