Total units outstanding in the United States Natural Gas fund (UNG) surged to a record 347.4 million units on Wednesday as investors continued to pour money into the fund, despite the recent downturn in U.S. natural gas prices. Total units outstanding in UNG have increased 34% since June 25, even though the fund’s current benchmark — the August New York Mercantile Exchange (Nymex) Henry Hub futures price — has fallen 16% over the same time period.

But any further increases in units outstanding will likely have to wait for another day, or more specifically, until and unless the Securities Exchange Commission (SEC) allows UNG to issue more units to the investing public. The fund announced on Monday that it had no more units to float under its existing shelf registration (see Daily GPI, July 8a), but it was awaiting SEC approval on its June 5 application to issue up to one billion additional units, which, if granted, would give it the ability to more than double its current units outstanding.

The recent happenings with UNG couldn’t have come at a more interesting time as the Commodity Futures Trading Commission (CFTC) revealed plans earlier this week to host a series of meetings through August to determine whether it should establish speculative limits on certain commodities, including natural gas (see Daily GPI, July 8b). 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).

As investors gobbled up the last of the remaining UNG units this week, the fund significantly increased its position in the August IntercontinentalExchange (ICE) Henry Hub swap contract. The fund added a combined 95,000 prompt month ICE swap contracts on Tuesday and Wednesday, bringing its current total to nearly 340,000.

While at least one media report noted that UNG now owns an equivalent of 124,926 natural gas contracts, which would constitute 86% of the total August open interest position, that overall percentage could be misleading because the calculation does not factor in the open interest in swap contracts. UNG only holds 27,203 actual August Nymex contracts. Its remaining positions are spread among August swap contracts traded on Nymex and ICE. ICE does not publish open interest data for its exchange traded swap contracts.

“It looks like [the media outlet] is taking UNG’s Nymex and ICE number and combining it to equal 86% of the Nymex. There is something weird there,” said Julio Sera, a broker with Hencorp Becstone Futures LC in Miami. “As for all of the hype surrounding this fund, I don’t really think their operation is doing a whole heck of a lot to this market. The intention of UNG is to track the performance of the natural gas futures contract at the Nymex.”

Sera said there are a lot of misconceptions about the fund. “One of the arguments circulating out there is now that UNG has run out of units to release to the public, the best buyer in the market won’t be there any more. However, that assumes they are only buying, which I disagree with. UNG has to hedge if someone wants to sell their units.”

No one is said to know what the impact of UNG on the futures market is. “Now that there are no more units, there is a possibility that UNG’s units will trade at a premium to what the natural gas market is trading at,” Sera said. “This would bring in arbitrageurs who would come in to bid up the futures on Nymex to close in on that arbitrage opportunity. That could be supportive to the market. However, if they are forced to liquidate for any reason, that would be bearish for the market. Right now, everything out there that is being said about UNG is all hearsay and speculation as to what is really going to be the effect. Until the CFTC comes down and mandates a decision on them, I don’t think that we should be getting excited one way or the other.”

UNG had no pending buy orders at the end of trading on Wednesday. But just because UNG cannot currently raise fresh capital does not mean that the fund won’t be active in the coming days. As one New York trader noted, “They’ll be buying, but they’ll be buying September (contracts), not August. And they’ll probably be doing it at a loss, too,” he said, alluding to the current contango market conditions in the Nymex natural gas futures strip. The August Nymex Henry Hub contract closed trading on Wednesday at $3.353, versus $3.478 for the September contract. On Thursday the contango narrowed slightly as August futures closed at $3.408 and September futures finished at $3.526.

Each month UNG rolls its positions in the near month futures and swap contracts into the following month. The roll occurs over four trading days, and typically starts approximately 10-11 trading days before the near month futures contract expires. The roll into September contracts is scheduled to begin next Wednesday (July 15), and to conclude on July 20. UNG has published roll dates for the rest of calendar year 2009 on its website.

UNG’s performance benchmark also gradually shifts during the roll period. As explained in the fund’s 2009 10-K filing with the SEC, after day one of the roll, its fund benchmark changes to 75% prompt-month, and 25% second month. After day 2 the benchmark moves to a 50-50 split, and so on until after day four, when the benchmark is 100% the second month contract. Thus, at the end of trading on July 20, UNG’s benchmark will be the September Nymex Henry Hub contract price.

Much has been said over the last two months about the fund’s rapid growth and alleged impacts on the natural gas futures market through its positions on Nymex and ICE. 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).

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