Since April this year, we’ve seen investors broaden their exposure to energy stocks by investing in natural gas.
The natural gas exchange traded fund (ticker: UNG) has been seeing some strong action recently. The chart below shows its trading volume (in dollar terms), relative to that of oil on a 50-day moving average basis. This means we’re seeing the average trading volume of the ETF over the last 50 days. And this is expressed as a percentage of the volume of oil traded.
Trading activity in gas is now 77% the value of trading in oil. This is up by a whopping 900% from March‘s levels of 7.6% (circled).
Natural gas has been catching the eye of investors recently
Source: Bespoke Investments
Despite the huge increase in trading volume, natural gas prices have been falling. While oil has rallied by 58% since the beginning of the year, gas is down by 34% for the same period.
One of the reasons natural gas prices are falling is its storage levels. When this is low, markets take this to be a signal for a smaller supply cushion - and prices will rise. When levels rise, it has the opposite effect and prices tend to drop. Only last week, the U.S. Energy Information Administration (EIA) said natural gas reserves were up 30% from last year - this swayed market trading accordingly.
We see the outlook for natural gas as positive. It’s 18 times cheaper than oil and there’s been rapid growth in its exploration and production technologies. The IEA expects prices to rise on stabilising demand. Falling rig counts mean a reduction in supply. All this points to a natural gas rally before the end of the year...
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