What's Moving Natural Gas Prices

UNNG invests in the front month future contract. The front month future is exposed to the most extreme price moves up and down just because it's nearest to the spot contract, whereas contracts further out on the futures curve tend to move a little less when there's a big shock, positive or negative, to natural gas prices. UNL owns the entire first 12 months in the future strip, so it tends to potentially mitigate some of that volatility.

But more importantly, natural gas tends to be a commodity that is in what's called contango, and that creates something you may have heard of called a negative roll yield. That can just be a headwind against your return, so UNL, when that condition is in place, can mitigate that potential negative roll yield. It doesn't guarantee a positive return, and being in the front month, even in a state of contango, doesn't mean you're going to have a negative return, but that is kind of a persistent thing in natural gas markets. So UNL is designed to try to mitigate that somewhat.

The outlook for natural gas, that's an interesting one because we are starting to, well, we have started to import considerably more liquid natural gas than we have in the past, but at the moment, it is still very much a US commodity. There are overseas contracts, but in UNNG and UNL, we are buying the US contract, and so it's very much driven by US supply and demand. That means weather events, like Gulf Coast hurricanes that take supply offline or interrupt shipping of liquid natural gas, can really impact the market.

So it's really driven by domestic production. We are running below the sort of the highs over the last five years that we hit last year, but we're above the five-year average. So, right now, natural gas started off the year great. It was up over 40%. It's now down over 20% year to date. That has a lot to do with weather and just the amount of natural gas storage.

But over the long term, again, as you mentioned, it's very vital. So I think that's a product that investors are looking at. If that's where you want to have probably a shorter term view, a tactical use, a tactical tool, as opposed to necessarily something you just buy and hold. And if you did want a longer period and the market's in contango, UNL is probably going to mitigate some of those headwinds that you face when contango is in place.