The United States Natural Gas Fund (UNG) announced in an 8-K filing with the Securities and Exchange Commission (SEC) on Tuesday that as of Tuesday, July 7, it had issued all of its remaining limited partner units to the investing public. As a result, the fund “will temporarily suspend the issuance of additional creation baskets,” or limited partner units, until the SEC approves UNG’s recent shelf filing.
Last Sunday UNG registered for an additional 1 billion units with the SEC, which, if granted, would give it the ability to more than double its current units outstanding. Some analysts are concerned that if the fund is unable to issue more units, demand for current units could inflate UNG’s market price above the value of its holdings. However, market pundits say arbitrage opportunities should prevent the value of the units from rising too far above the net asset value of the fund.
UNG further noted that the 32.1 million units it had left to issue under its current shelf registration as of last Monday were all issued the very next day. The fund had 281.4 million units outstanding at the end of trading on Monday, and that total could rise to more than 300 million, assuming there were no net redemptions against the 32.1 million new units issued Tuesday.
Much has been made over the last two months about the fund’s rapid growth and alleged impacts on the natural gas futures market through its positions on the New York Mercantile Exchange (Nymex) and the IntercontinentalExchange. Late last month after sitting down with John Hyland, UNG’s chief investment officer, a team of analysts with Citi Investment Research & Analysis said due to the fund’s rapid growth and significant size, it could be “propping up” front month natural gas prices at the indirect expense of the back end of the natural gas 12-month strip (see Daily GPI, June 29).
Investor interest in UNG has soared the past few months, with outstanding units rising from 38.9 million at the end of February to 261.8 million as of June 30. To help put that in perspective, the Street.com noted that UNG attracted $1.7 billion in investor capital in June, or 14% of all new money that flowed into ETFs during the month.
UNG issues limited partnership units to the general public by issuing creation baskets, which are blocks of 100,000 limited partner shares that are first sold to a list of seven authorized purchasers. These authorized purchasers will then either hold the units for their own accounts, or disseminate them to the public in an underwriting capacity.
While the fund noted that the suspension of the issuance of creation baskets will have no impact on its ability to redeem existing units, not being able to issue new limited partnerships will certainly restrict its access to new capital. That, in turn, will impact its ability to purchase additional near month New York Mercantile Exchange (Nymex) futures contracts, along with related Henry Hub swap contracts. UNG had been building its relative stake in the August 2009 Nymex natural gas contract recently, with its percentage share of open interest in the August contract rising from 13.3% on June 26 to 18.3% on July 6.
Interestingly, UNG’s announcement came on the same day the Commodity Futures Trading Commission (CFTC) revealed plans to host a series of meetings this month and in August to determine whether it should establish speculative limits on certain commodities, including natural gas (see related story).
A New York City trader noted the CFTC’s decision could be swayed if UNG is awarded its 1 billion unit shelf registration before then, and if natural gas prices subsequently rise. “Nobody ever seems to care that much if speculative interest rises in the face of falling prices, like it has the last few weeks. But if (natural gas) prices rise after a lot of new money enters the ring, the CFTC will take notice,” the trader said.
In a filing with the CFTC in early June, UNG management said that as a passively managed commodity index fund with a “neutral” investment strategy, the CFTC should free it and other exchange-traded commodity index funds from position limits and grant them “no-action” status with respect to their activities (see Daily GPI, June 23).
A Washington, DC-based broker said he believes the whole UNG “hoopla” is a case of “much ado about nothing” because the market is simply too big to be pushed around by one fund. “I think these things are much exaggerated. Traders have been looking for the boogey man since the concept of a boogey man was invented,” the broker told NGI. “Some traders believe UNG’s position is a bullish influence on the natural gas market, but if that was the case I would think we would be moving higher. Looking at the volume and open interest for natural gas, we’re really in the tank. The open interest right now is about 731,000 contracts, which is small compared to what it used to be. It has been rising recently, but it has been rising on declining prices, which is a bearish sign.
“Everyone we talk to on the subject of UNG has told us that the fund is a house of cards. It does not really track the gas price and there are all kinds of issues with the roll that they go through,” he said. “Now, it seems to me the roll would kill them if they were long only because the differential is several cents. When they roll forward, they sell the current month and buy the next month, but they are buying the next month at a higher price.”
In general, the broker said he believes the markets are too big for any one factor to make that much of an impact. “These stories make for good press and that’s about it,” he said. “Of course there was Amaranth, but that was the market punking somebody — and it did not last very long.”
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