Energy ETFs Aren’t Fazed by Spring
Crude oil recently passed its six-month high and is near $80 per barrel on stepped-up buying from hedge funds and a continuing strike at Total SA refineries in France.
With winter coming to a close, should investors in coal, natural gas, or oil ETFs be concerned that the value of these funds will decrease as spring temperatures reduce demand for heating?
The short answer is “no.”
If the price of oil declines, it will not necessarily be due to winter ending. According to the historical performance of United States Oil Fund(USO), which tracks the price of crude oil, there usually has been no drop-off in prices when spring begins.
The outlook for oil will continue to follow the path of the global recovery, with the price of oil increasing if economies worldwide improve and industry continues to expand.
What about natural gas fund investors? Will they see a spring thaw dip in the value of an ETF such as United States Natural Gas Fund(UNG)?
For UNG as well, there seems to be no correlation between the season and the value of the fund. The high for UNG during the fall months in 2009 was higher than any price level reached by the fund so far this winter. And like USO, UNG’s 2008 high occurred in the middle of summer.
The sad thing about UNG is that there also has been little correlation between it and the broader economic recovery. On the other hand, my recommended alternative way to invest in natural gas, First Trust ISE-Revere Natural Gas(FCG), appreciated in the past year. Based on its historical performance, it will also not experience a weather induced springtime drop.
Like oil, there are economic factors that can move natural gas upwards during warm seasons and natural gas ETF investors should not fear the spring. A sudden rise in natural gas prices should not be expected either as the U.S. Energy Information Administration predicts that prices will not rise dramatically in 2010.
The trends in coal prices and for the Market Vectors Coal ETF(KOL) also look to be independent of the weather. Coal has rallied this year, partly due to this unexpectedly cold winter’s effect on inventories, but analysts in a Bloomberg survey expect that prices will continue to increase and remain elevated in 2010 at roughly 20% over their current values, partly because of greater-than-usual demand from China. The companies in KOL and the fund as a whole will benefit from this price trend.
In conclusion, ETF investors do not have to worry this spring about seasonal fluctuations in natural gas, oil, or coal prices.
In the very short term, there may be speculative bumps upward or downward depending on the outlook for severe weather.
But what investors should really focused on the longer term reasons that they may have for investing in these fuels, such as the economic recovery in emerging and developed markets.
