Thursday – Meet UNG, Natural Gas’ Very Own ETF

Thursday Topics:

  1. UNG Unveiled
  2. Oil Report Review
  3. Natural Gas Report Preview
  4. Holdings Watch - A few changes yesterday
  5. Odds & Ends

Yesterday was my kind of day! Refiners down, tankers up...big! See the portfolio changes below. Allright, enough of that.

From the people who brought you USO, Victoria Bay Asset Management, comes UNG, the somewhat unfortunately named natural gas ETF. It's designed to mirror movements in Henry Hub prices. Note to readers: if you want to trade oil and/or natural gas do yourself a favor and get a futures account. At least if you plan to be long. Why buy an asset backed ETF that charges a management fee? I really don't get that.

For example, let's take a look at the how the (USO) ETF, which began trading April 12, 2006, has borne up against its stated benchmark, West Texas Intermediate crude.

According to the USO's profile on Yahoo: The investment seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil. The fund is nondiversified.

Now, at one week past the USO's one year anniversary let's see how it bears up against WTI.


I don't know if it's the expenses or the "investing in other types of crude, yada, yada, or other oil intersts" that has caused the divergence but man did they fail to match WTI!!! As for UNG I may use it from time to time as a short term vehicle but for a long term hold...not a chance.

Yesterday Oil Sank Then Rallied.  May crude, which expires Friday, was off $0.50 before and after the inventory report but caught a nearly one dollar bounce towards the close of NYMEX trading to settle off $0.08 at $64.38. The bounce is most likely attributable to Mahmoud and his atomic sabre telling anyone who will listen "we will cut off the hand of any invader". Wrong - 15 Brits came home with 30 hands just a week ago yet you called them invaders. You have to be consistent or you become the boy who cried wolf.

Let's take a look at those oil inventory numbers

  • Crude: A 1 million barrel draw instead of a small expected build. More refineries demanding crude was the driver. Crude imports actually rose by another 100,000 bopd.  Iran and Venezuela said last night  that OPEC quota compliane is flagging - thanks for the confimation boys!
  • Gasoline stocks saw a draw of 2.7 million barrels, about double Street expectations.
  • Imports Tick Back Over 1 million Bgpd. No comment other than this needs to continue.
  • Utilization Increases To 90.4%, Crude Inputs To Refineries Increase Commensurately. My back of the envelope reckoning of refiner restarts had utilization breaching 90% next weekbut there are 144 refineries in the U.S. and not every one makes a headline out of starting and stopping production. Utilization should top 91% next week.


  • Demand Growth Actually Fell Off It's Recent Torrid Pace. Demand response to high prices? Maybe. But two weeks does not a trend make. We need to see another couple of reports before getting comfortable with the idea that the consumer is once again caring about near $3 gasoline. Next week should see a lower number bacsed on the impact of snow in the west and midwest and the rain in the east.


Natural Gas: Draw Certain But It Doesn't Really Matter.

  • HDDs rose to 144 last week as a (last) bought of cold weather traversed the country.
  • Last year we saw a build of 57 Bcf but the transitional weather seen in this should season month has yielded a broad range of expectations (-47 to +69 going back to 1994).
  • Storage stands at 1,592 Bcf, the second highest level for this time of year on record and nothing short of a 86 Bcf with drawal is going to knock this week's storage tally out of second place.
  • My expectation: a withdrawal of 45 Bcf. Caveat: I don't hang my hat on expectations during the shoulder season as demand is often relatively soft and storage operators have a different set of priorities this time of year which can lead to some odd looking numbers.
  • Tomorrow or this weekend we'll take a look some more forward looking gas demand data.
  • Natural gas near term forecast: I continue to this gas makes a run on $7 and perhaps falls as low as $6.50 within the next two to three weeks. After that everyone, including this site, will start closely watching dust and wator vapor whipping off the west coast of Africa for signs of the next bad blow.

Holdings Watch: Next week will probably be the last one in which I touch May options. Moving on to June and beyond with this week's expiry.

  • Sold half the (TSO) 110 May puts for $6.60. Trust me this is nothing to cheer about given my refiner put perfromance for the last 3 weeks but it's a start. The performance tab is updated as well so you can see for yourself the pain and suffering of my other Tesoro puts. That (WNR) put position looks pretty good though and their deal with Giant is definitely on the rocks.
  • (NFX) - added an initial position in the $45 May  calls and I really don't care what the stock does between now and earnings (April 26) as the Woodford update on the call should be pretty illuminating.
  • (TK) - sold two-thirds of my $55 May call position for $5.30, acquired beginning late April for $1.70. Investors cheered TeeKay's 1/2 acquisition of OMM this morning by driving (TK) up a whopping 7% on the day! Hey, I was in for the whole "OPEC 's cheating hypothesis" but if people want to bid up the acquiror in a merger, who am I to argue. Buy something else guys!

Odds & Ends

Analyst Watch: (TNP) and (TK) go from hold to sell at Citgroup which has managed to downgrade a different sub sector of the energy complex every day this weeki. (CRZO) downgraded to neutral at Wachovia which may provide the buying opportunity I've been looking for.

China Watch: Crikey! 11.1% GDP Growth.  Look for the spin here to be bullish for oil.  More on this later.

Alaron Watch: Day 2.  That inventory report didn't help.  Maybe Mahmoud can.

34 Responses to “Thursday – Meet UNG, Natural Gas’ Very Own ETF”

  1. 1
    zman Says:

    Oil – be careful chasing puts. May expires Friday and it’s down a lot more than the out months. Just saying be careful watching that ticker bug on CNBC – that’s may and that’s related to what Phil at PSW has been taliking aobut with barrels at Cushing vs Nymex positions.

  2. 2
    zman Says:

    Merrill downgrades BP to neutral from Buy

  3. 3
    zman Says:

    VLO has McKee back to 50% – headline says earlier than expected since they had said by month end April.

  4. 4
    dave Says:


    very tempting to chase oil services & tankers. I have one position NFX

  5. 5
    dave Says:

    long….calls on NFX

  6. 6
    sane Says:

    Hey z,

    Did you see the statement about Iraqs oil reserves?

    A new report estimates that Iraq’s oil reserves could be up to 116 billion barrels, ranking them third largest in the world and much larger than previously thought, said IHS Inc. Thursday, a consultancy group which has compiled the Iraq Atlas, the first detailed report on the country’s oil reserves and production since the start of the U.S.-led invasion.
    The report estimates that there could be another 100 billion barrels of oil and a large amount of gas in the Western Desert of Iraq, IHS said in a statement Thursday. The Iraq Atlas will be released by IHS on May 9.
    “Most of Iraq’s oil production comes from the south of Iraq and is exported via the Persian Gulf because of repeated sabotage attacks on facilities in the north,” said Mohamed Zine, IHS regional manager for the Middle East, in a statement. As a result, current production capacity is two million barrels of oil per day.
    “However, the Iraq Atlas estimates indicate that given a stable political and civil environment, Iraq has the potential to produce four million barrels a day in the near term if necessary investments are made in repairing and modernizing facilities,” Zine said.


  7. 7
    zman Says:

    Sane – no I didn’t Sane. Thanks.

    Not surprised though and wouldn’t be surprised to the hear the same out of Iran. Years of neglect, lack of access to technology.

    That Addax Petro – AXC – has tested a couple of mammoth wells in Kurdish Iraq. I’ll bet that region’s reserves are underestimated.

  8. 8
    zman Says:

    Dave – I’m getting closer to adding a second tranche of calls on NFX today.

    Also, CRZO on that downgrade.

    The group (XOI at least) looks like it will pull back for a few days so I’m going in pretty slowly.

  9. 9
    zman Says:

    Gas Storage: draw of 46 vs my estimate of 45

    Expected draw of 35-40 Bcf

    Like I said, I think this really doesn’t matter but they’ll spin it bullish in a minute on the tube

  10. 10
    zman Says:

    Yup CNBC spun it positive and had a Raymond James analyst on saying they expect much higher prices later this year and significantly prices in 2008 (with no explantion of why).

  11. 11
    zman Says:

    Added to my May $105 TSO puts at $3.60

  12. 12
    zman Says:

    SCU approved $40 million budget and the crazy little stock is back to a buck. Apparently the loss of the old CEO is a good thing.

  13. 13
    zman Says:

    APC, DVN, EOG – all not making much hay out of the “bullish” gas draw.

    Looking to add some DVN puts (just for a quick trade)

  14. 14
    zman Says:

    took May $70 puts at $1.50

  15. 15
    Fred Says:

    Zacks Equity Research Analyst Blog
    http://www.zacks. com/blog/ post_detail. html?t=7962

    With its share price having close to doubled since Zacks senior
    energy analyst Sheraz Mian upgraded the stock to a Buy last fall, oil
    refiner Tesoro (TSO) has even more room to appreciate. Looking into
    his latest Buy report on the company, we found some reasons why:

    “Tesoro shares have run up significantly following the
    acquisition of Shell’s Los Angeles refinery and other
    downstream assets. The acquired assets fit in well with
    the company’s West Coast-focused operating base and provide
    for meaningful synergy capture and growth opportunities. The
    acquisition, expected to close towards the end of the current
    quarter, will be accretive to earnings and cash flows immediately.

    “Our estimates are being raised to reflect contribution from
    the Shell refinery and the strong West Coast refining environment.
    This is the core of our continued positive outlook for Tesoro
    shares. Our new 2007 and 2008 EPS [earnings per share] estimates
    are $13.45 and $14.31, up from $10.65 and $11.92 before, respectively.

    “We have always liked this name and the feeling has only increased
    with this transaction. We have raised our price objective to $125,
    which we determine using a 2007 P/E [price-to-earnings] multiple of
    9.3x. We believe that Tesoro is better positioned than most of its
    peers in the current environment given the positive margin outlook
    for its core West Coast market.”

  16. 16
    zman Says:

    Thankss Fred…good to have the counter view.

    But the west coast crack has driven TSO higher. The refinery addition should already be relfected in most analyst’s numbers. Nothing really new in their research. And I agree on it’s positioning but a double in the last 3 months, I don’t think so.

  17. 17
    zman Says:

    Gates rattles Iraqi leaders cages on lack of progress today. It’s a face saving culture and he just told them to hurry up and get everything done sooner rather than later. Seems to me that plays into the hands of the opposition.

  18. 18
    zman Says:

    Robert – hope this morings post answered your email. As to volatility increase I sort of doubt it but nat gas would be more subject to it than oil as its a more local market. We’ll see if people start to play games with UNG the way they do with USO.

  19. 19
    Eric Says:

    ZZZ, What’s your take on SLB before earnings? I currently hold the May70puts.


  20. 20
    Sambone Says:

    Current selloff of WTI is artifical. Because of the glut in Cushing, it is affecting the whole oil market. Once the May contract expires, I see oil up. Look at the Sept contract. Brent is higher currently, which has not happened before. Once the refiners start bring down the supply in cushing, where it’s priced, we’ll see higher prices. I think T Boone is right, we’ll see $70 before we see $60. IMHO

  21. 21
    Popeye Says:

    Well the OIH managed to close just above 150. Will we gap down at the open tomorrow??? This short is hoping.

  22. 22
    zman Says:

    Eric – nothing specific on SLB – I’m sure they’ll have a great quarter. I’d be careful holding service stock puts through the report

    Sambone – understand the situation at Cushing – saw another article about how Canadian crude is making a regional oil glut at Cushing. The out month contracts fell as well just not as much…see my first comment of the day. In a vacuum that would be true but curde imports are on the rise as well as OPEC contnues to pump more oil on a daily basis. I think you see $60 before $70 but I think it’ll take a little while.

  23. 23
    zman Says:

    Popeye – have you guys had troube commenting today or where you just wainting on the close? I thought I had suddenly become very unpopular. AM, N, EL D – no comments for days. Odd

    As to your question – I dunno. Who’s first on the roster to report. We had several warnings over the last two weeks and you’ve seen the rally which makes little sense.

  24. 24
    zman Says:

    Eric – Good luck re SLB. I just didn’t see your email in time to go do anything of value on it. Are you a member of Phil’s Stock World? Phil’s been suggesting it as a short for the last 3 or so days.

  25. 25
    zman Says:

    That SUN refinery that returned to service this week in Philly is expanded to add another 90,000 bpd of gasoline production capacity.

    A drop in the bucket next to the 17+ mm bpd capacity of the 144 domestic refiners but still, a much needed drop.

  26. 26
    Popeye Says:

    No problems posting here.

  27. 27
    bill fraser Says:

    Bear claws Teekay

    Shares of Teekay Shipping turned down today and surrendered some of Wednesday’s gains after a bearish analyst downgraded the stock, saying the Vancouver owner’s $1.1bn acquisition of OMI Corp would not add value for shareholders.

    Teekay shares were down nearly 5% to around $57 after Citigroup’s John Kartsonas cautioned investors that Teekay’s return on OMI – it is splitting the $2.2bn buy with Denmark’s Torm – would be only 5.7%, well below its cost of capital at an estimated 9%.

    Kartsonas said there was no justification for Teekay shares, trading at nearly $60 following Wednesday’s OMI-inspired rally, to be at 17 times estimated 2007 earnings of $3.50 per share. He downgraded the stock to sell and set a 12-month price target of $49.

    “We see little reason why someone would be buying a shipping company at above-market multiples, especially given the fact that the industry is facing increasingly negative fundamentals as it relates to supply and demand,” Kartsonas writes.

    “Teekay will actually lose money on the transaction and take a significant risk relating to the asset prices or rate environment going forward,” he writes. “It is quite difficult to envision a scenario that the deal is attractive from a return perspective.”

    Kartsonas was among the analysts quizzing Teekay management, led by chief executive Bjorn Moller, in a Wednesday conference call on the OMI deal. Management said the buy would add immediately to Teekay’s bottom line, would add 10% to earnings in 2008, and would generate a 13% cash-on-cash return.

    Managers clearly were not buying Kartsonas’ view of a significant overall weakening in tanker rates, with Moller saying market balance would be “tight” over the next two years. The analyst is projecting Teekay’s earnings will drop 35% this year on rates, well below the 20% dip suggested by Wall Street consensus.

    While Kartsonas acknowledges that the deal could look better if Teekay includes the OMI vessels in its late-2007 public offering Teekay Tankers, he adds, “such financial engineering does not create value over the long term, it just takes advantage of temporary mispricing in the public markets.”

    Two more Wall Street analysts are a little more kind to Teekay in maintaining hold ratings on the share today. Scott Burk of Bearn Stearns calls the deal “full value but accretive,” while using a lower figure than Teekay’s estimate for 2008 based on a lower prediction of hire rates. Urs Dur of Lazard suggests “Teekay may have paid a high price for OMI’s assets; while the deal makes sense on the bottom line&it will likely have little or no impact on return on equity.”

  28. 28
    Eric Says:

    Z, No problem. I ended up selling the puts for a profit before the close. I didn’t want to risk it.

    great site, btw!

  29. 29
    zman Says:

    Bill F – Thanks for posting that. I knew he hated the deal but didn’t have the deets.

    Glad I came out 2/3 rds before he hacked them.

    In the past when a seasoned management has made an acquisition like this and the company disagrees with the analyst, it is my experience that the analyst is often missing something, has a grudge (it’s not beyond belief) or is not a very good analyst. Only occassionally have I seen a seasoned management team like this screw the pooch for no reason

  30. 30
    zman Says:

    Eric – sweet . When in doubt sell half! When really in doubt, get out!

    Glad you like the site. Please ask questions and make comments often. It gets pretty quiet in here sometimes and I spend most of my site fielding questions or just annoying people over on the PSW site with the constant oil commentary.

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