Friday, September 18, 2009

UNG Rollover Dates, Use of Swaps Will Erode Price Further

As reported last week, UNG has filed to possibly reopen for new investments. However, instead of buying actual future contracts, UNG intends to use swaps. UNG can't buy any more contracts because it is too large, with assets of over $4.5B. It had only $300M last year.

On one hand, UNG needs to rollover its contracts every month and this pushes those prices higher. Every time it buys contracts, it needs to buy a very sizeable number of contracts, which are saw this week. After the rollover, hoever, the price declines so that the futures price converges to the spot price. We know storage is almost full. We shall see. So this would be a great opportunity to go short UNG. Of course hurricanes are coming, so we can expect high volatility. Nothing is without risk.

Morningstar's Paul Justice discussed UNG today. When asked whether UNG should be more regulated as it can distor prices due to its sheer volume, he says capital markets will take care of UNG. The swap providers will charge high fees for the swaps, causing further price erosion to UNG.: Watch video.

Here are the UNG Rollover dates :

- September 14, 2009 through September 17, 2009
- October 14, 2009 through October 19, 2009
- November 10, 2009 through November 13, 2009
- December 15, 2009 through December 18, 2009

This is what is happening with the futures contracts today as of 1:35PM:

You can see that UNG having just swapped October for November contracts, has just lost 19.3% of its contracts. It should be fun to watch from now on.

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