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Futures Fund UNG Holds Large Natgas Position

June 8, 2009
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Questions are continuing to surface about the large futures market positions in natural gas that have been taken by the United States Natural Gas Fund LP (UNG), an exchange-traded fund that is described as a pure play, on the price of natural gas in the front-month futures contract.

Some industrial buyers of natural gas are concerned as to what impact trading by the fund might have on the price of natural gas, noting the price run-ups last year in oil and natural gas which have been ascribed in part to excessive speculation by noncommercials.

UNG listed its open interest at the end of business on several days last week in a range between 18,000 and 25,000 of July 2009 futures contracts on the New York Mercantile Exchange (Nymex) valued at well over $2 billion, and well above Nymex's 6,000 accountability limit for contracts in a single month. The accountability limit for contracts in several months combined is 12,000. On the days in question the UNG position represented about 12% to 13% of the Nymex open interest for the July contract.

One futures broker questioned whether the Commodity Futures Trading Commission (CFTC) was monitoring the UNG trades. He told NGI "I know my clients get calls from the CFTC when their positions go above 200 contracts, which is a lot less than 18,000. This isn't British Petroleum that moves a huge amount of gas. This is somebody that is like a retail mutual fund. Why should they get special treatment?"

However, a CFTC spokesman pointed out that going over the accountability limit simply means the CFTC's surveillance team will be closely monitoring the fund's trades. "We are monitoring their positions as we monitor the positions of all large traders. We can ask their intent, and we are watching to see there is no congestion and they are not disrupting the market."

The fund manager claims "our impact on the natural gas price is very minimal, if at all." UNG rolls out of the front month contract two weeks before it expires, and it closes out daily business by 2:30 p.m., well ahead of the daily deadline. The fund has added positions in OTC swaps and front month contracts on IntercontinentalExchange (ICE) to its mix.

"We're a passive speculator, so Nymex is working with us on this." Jim Stegal, manager of Institutional Sales/AP Relations at ALPS Fund Services, Inc. in Denver, said it had been Nymex's suggestion that the fund diversify its holdings into swaps and ICE contracts.

UNG listed its open interest at the end of business Tuesday, June 2, as 18,585 July 2009 futures contracts On the same day Nymex listed its open interest for the front-month contract at 143,489 contracts, which means UNG had 12.9% of the open interest for that contract on the exchange.

On the same day UNG also listed holdings of 85,746 July 2009 natgas swap contracts, which would equal about 21,400 Nymex contracts, and 92,662 natgas futures contracts on ICE, the equivalent of another 23,000-plus Nymex contracts. UNG listed the total value of its natgas open interest on June 2 as $2,603,304,000.

The fund started operations April 18, 2007. The fund's net asset value is off 34.40% year-to-date and off 68.66% in the last year.

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