UGAZ: No Sign Of Recovery?

11:19 pm ET, 04 Dec 2017

natural gas pipeline

VelocityShares 3X Long Natural Gas ETN (NYSEARCA: UGAZ) is one of the worst performing ETFs since the beginning of the year.  Its dismal performance is driven predominantly by suppressed natural gas prices. 

The reason why natural gas prices are low is that supply has been abundant, and demand growth has been weaker than expected (partially due to mild weather), which drove the prices down.    

Future gasoline demand growth in the US is likely to stagnate.  In the near term, we see two key elements that have driven the recent growth in gasoline demand running out of steam: prices are unlikely to decrease further significantly, and unemployment levels are unlikely to improve much more.

In 2018, we are likely to see higher gasoline prices than we saw in 2015-16.  Although lower prices have been the primary variable, we think steadily improving employment levels have also contributed to a recovery in gasoline demand. Typically, higher levels of employment would mean more commuting--that is, more miles driven. With unemployment currently at 4.4%, further improvement compared with the past several years is likely to be limited, given that the lowest point on record is 3.8%.  

Also, the market for Liquified Natural Gas (LNG) is fairly nascent.  It may not impact the demand for natural gas in the near term.

Over the last year, VelocityShares 3X Long Natural Gas ETN (UGAZ) has returned -74.21%.

Over the last year, VelocityShares 3X Inverse Natural Gas ETN (DGAZ) has returned +1.87%.

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