The VelocityShares 3X Long Natural Gas ETN (NYSEARCA: UGAZ) provides triple exposure to daily price changes on the S&P GSCI Natural Gas ER Index, a relationship that has driven share prices down more than 99% since January 2014, while natural gas prices fell by 45.4% through August 26, 2016. The fund is intended to be used primarily by day traders due to the compounding that results from daily rebalancing, which adjusts holdings after the close of trading to ensure triple exposure to price changes for the following day.
Despite its steep fall since 2014, the fund is popular with traders, with assets under management (AUM) of $368.51 million and average daily volume of $99.32 million. The following is a six-month snapshot of the exchange-traded note (ETN).
A Second Reverse Split
Due in large part to falling out of compliance with New York Stock Exchange (NYSE) requirements as a result of a share price decline below $1, Credit Suisse Group AG (NYSE: CS), which is the counterparty for the ETN, implemented a reverse split on March 14, 2016. Shareholders received one new share for every 25 pre-split shares. Credit Suisse had implemented a one-for-five reverse split in September 2015, but a 91% loss in share value from September 2015 to March 2016 necessitated a second reverse split.
A Rough Start
Due primarily to continuing oversupply and mild 2015–2016 winter temperatures, prices on natural gas remained under pressure in the first quarter of 2016, with the price of Henry Hub natural gas falling to a multi-decade low of $1.57 per million BTUs during the first week of March 2016. Moving in sympathy with falling prices, the VelocityShares 3X Long Natural Gas ETN made its all-time low at the same time, falling to $16.80 per share on a reverse split-adjusted basis.
The Peak of Production
With prices too low to generate drilling profits, natural gas production peaked in September 2015. By the end of 2015, the number of producing wells had declined to 200, from 340 producing wells at the end of 2014. By May 2016, the producing well count had fallen further to 87. The effects of the drop in production, however, were muted by low demand, resulting from higher-than-normal winter temperatures. As a result of slack demand, natural gas inventories had increased by 67% over 2015 levels by the end of March 2016. However, estimates for warmer-than-average summer temperatures and expectations of increasing demand for natural gas for electricity generation put a floor under prices as the second quarter of 2016 began.
Firming Natural Gas Prices
By the third week of April, natural gas prices had increased 21% from the March low to $1.91, and the VelocityShares 3X Long Natural Gas ETN was up 83% to $30.75. Additionally, the narrowing spread of inventory levels to the five-year average added a long-absent bullish tone to the market. However, a slight build in natural gas inventories in May resulted in small losses in natural gas prices and a decline of 33% in the shares of the ETN, to $21.16.
Summer Heat Drives Demand
June 2016 began with increased demand for natural gas as temperatures soared across the country, drawing down inventories at a rate that, if maintained until winter, were projected to result in a level well below the five-year average. By the first week of July, natural gas had made a 13-month high at $2.98 and the VelocityShares 3X Long Natural Gas ETN had appreciated to $49.75, a gain of 200% from the March low. While natural gas prices moved in a sideways trend for several weeks after making highs for the year, share prices of the ETN remained volatile, declining to $29.76 in early August before rallying back to the high $30s by the end of the month.