A respite to the energy sector seems unlikely given that oil has resumed its brutal plunge on renewed signs of global supply glut and weakening demand. In fact, First Trust ISE-Revere Natural Gas Index Fund (FCG - ETF report) has been the worst performer in the energy space from a year-to-date look, losing over 37% (see: all the energy ETFs here).
Weak Commodity Trends
Global demand for natural gas has been waning. The major culprit is China, which has been experiencing a persistent slowdown despite rounds of monetary easing. The latest measure taken by China to devalue its currency has raised more worries over demand in the world’s second-largest economy. Furthermore, slowing growth in Japan, Europe and the developing economies are also putting pressure on global demand.
On the other hand, production from major shale plays has been on the rise as new technologies are making it far easier to extract natural gas from the ground. This is more than enough to meet the current demand. Even the rising demand for natural gas in summer for cooling purposes has not been able to make use of the surging supply (read: Top-Ranked Sector ETFs to Buy for Summer).
As per the latest EIA storage report – a key mover of the natural gas markets – natural gas stockpiles rose 65 billion cubic feet (bcf) in the week ending August 12, much above the market expectation of 55 bcf and an inventory build of 32 bcf in the preceding week. This marks the nineteenth successive weekly injection. Total inventory increased 21.2% from the year-ago level and 2.8% from the five-year average, suggesting that a bearish trend for natural gas might continue at least in the near term.
Furthermore, the weather forecast for below-than-normal temperatures in the next two weeks will likely reduce cooling demand in homes and business, adding to supply glut and leading to a further drop in natural gas price. Moreover, with the end of summer, demand for natural gas generally starts waning as high temperatures recede and people use less fuel. Natural gas inventories grow before winter heating demand kicks in.
Based on the current trends and a dismal outlook, natural gas is expected to continue its losing streak in the months ahead, with more pain in store for natural gas producer stocks and FCG (read: Precious Metal & Natural Gas: Two ETFs Trading with Outsized Volume).
FCG in Focus
This ETF offers exposure to U.S. stocks that derive a substantial portion of their revenues from the exploration and production of natural gas. It follows the ISE-REVERE Natural Gas Index and holds 30 stocks in its basket, which are well spread out across components.
Cimarex Energy (XEC), Anadarko Petroleum (APC) and EQT Corporation (EQT) occupy the top three positions in the portfolio with a combined 14.5% of total assets. This indicates that no single company dominates the fund’s return, preventing heavy concentration. The fund has a blended style and is diversified across various market cap levels with 53% in small caps, 31% in mid caps and the rest in large caps.
The ETF has amassed $194.3 million in its asset base while sees solid volume of nearly 896,000 shares per day. It charges 60 bps in annual fees from investors and has a Zacks ETF Rank of 4 or ‘Sell’ with ‘High’ risk outlook, suggesting that the product would continue to underperform for the rest of the year (read: Oil Tumbles to Six-Year Low: ETF Tale of Two Sides).
In Conclusion
Investors could see more supplies being added in the coming weeks to the vast natural gas stockpiles thanks to new fracking technologies. This, coupled with the forecast of mild weather, could hurt the natural gas ETF further, extending the brutal trading into the months ahead.
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