(An ETF, or exchange traded fund, is a security that tracks an index but trades like a stock.)

The two charts tell us that despite all the bearish fundamentals for natural gas in North America (and there are lots!), the time to buy UNG is very near.  The chart for the Canadian natural gas ETFs (GAS-TSX, HNU-TSX) tells the same story.

In February of this year, when everyone thought oil was going to stay at $40-$45 per barrel throughout 2009, the ETF for oil in the US, USO-NYSE, bottomed.  Its downward momentum was matched almost exactly with a rising crescendo of volume from investors.  The ultimate low was still a couple weeks away, but as soon as the volume started to subside, the ETF tracked higher. 

UNG-NYSE and GAS-TSX are now showing signs of going through the same tell-tale crescendo of volume.  This would indicate that investors believe the natural gas price in North America has bottomed, or is very near bottom.

There are several bullish fundamental factors for natural gas. 

 1)         The most compelling is that the number of rigs exploring for natural gas in the US is down 50% from last year at this time, at 700. Industry analysts are predicting a sharp drop in supply resulting from this.  I wrote in an earlier article that oil and gas specialist Tristone Capital out of Calgary is expecting a 7 bcf/d (billion cubic feet per day) drop in production in the US by late spring 2010.  This would be a huge drop.

2)         Combine this with any increase in industrial demand and the table is set for significantly higher prices.

3) An increasing number of experts are explaining how the real, all-in, cost of production, including land costs, are $7 – $9 per mcf (million cubic feet), and twice the price of natural gas right now. Investors who don’t think this can continue should remember the phrase “the markets can remain irrational longer than investors can remain solvent.”

But there are several bearish factors for natural gas prices as well. 

1) New shale and tight gas plays in the US and Canada continue to prove up huge supplies of low cost natural gas, lowering the break-even price for operators.

• 2) The amount of gas going into storage is almost at record levels – and the rate of injection increases this year over the 5 year average is going up, i.e. demand destruction is still outpacing supply destruction – by an increasingly wide margin. Not by a narrowing margin. Yet. (This is what the bulls are waiting for – watch natural gas stocks scream upwards when that dream becomes reality.  The market thought they had a sniff of that yesterday & took natgas stocks higher, even though the actual number was bearish.)

3) The fast growing, low cost Liquid Natural Gas (LNG) sector is a wildcard. It could swamp North American shores as a cheap source of supply or it may miss here completely and end up in Asia or South America.

Almost all research analysts and the talking heads on business TV say natural gas prices will continue to go down through August, and then begin to rebound.  How big the rebound is, is where opinions begin to differ.

These ETF’s are strange creatures in that stocks inherently track the future, they track expectations of financial picture 6-9 months from now. Yet ETFs track indexes that are based solely on current prices.  I think the only way you can see the future in an ETF is by the volume. And that’s what makes the natural gas ETFs so intriguing right now.

If and when I buy a natural gas ETF, I will buy the GAS:TSX.  For my American audience, if gives you a Canadian dollar denominated security, which is good if you think the US dollar will continue lower.  Second, I prefer it over the HNU:TSX ETF by Horizons Beta Pro.  GAS-TSX has no leverage, and does not reset itself every day, and I believe it more accurately tracks the commodity price.  Remember that GAS:TSX tracks the Canadian gas price out of Edmonton, AECO, which can be found at www.ngx.com.  It does not track NYMEX.