June 18—An increasing number of tools and vehicles are becoming available that allow a wider variety of investors to participate in commodity and security markets. In the natural gas commodity marketplace, a relatively new set of tools are Exchange Traded Funds. An ETF is a registered, exchange traded security that can be bought and sold in the same manner as any other registered investment fund. The difference is that a natural gas-focused ETF invests only in forward natural gas contracts.

Participation in natural gas ETF's has exploded over the past year. For example, the largest natural gas ETF, United States Natural Gas Fund LP, has increased in size by over 700 percent from roughly 30 million units on Dec. 31, 2008 to over 260 million units as of June 16. UNG now has natural gas positions in excess of $4 billion and cash on hand of over $3.6 billion.

The days are over when the natural gas financial markets were largely defined by producers forward selling contracts to protect revenue streams and consumers forward purchasing contracts to protect operating costs. In the past, the process of purchasing and selling forward contracts was complicated because of initial margin requirements, margin calls when markets moved and execution risk when contracts expired. That limited market participation to parties with a strong and direct interest in the market and the financial capability to manage market positions. ETF's have created an environment where market participation is very easy. For example, a unit of UNG would cost less than $16 today. There would be no margin calls or execution risk. Units can be purchased through your investment account and if you change your mind tomorrow, you can simply sell them.



This development is neither good nor bad, but it certainly is important! Massive amounts of capital can now flow in and out of the natural gas market from unknown sources with unknown motivations. ETF's are a new kind of market participant whose impact we are still trying to discern.

The bottom line is, it is reasonable to expect continued market volatility as it becomes easier for money to move in and out of the natural gas marketplace and as a wider variety of investors start viewing natural gas as an asset class.

Casey Whelan, vice president of strategic initiatives, can be contacted at cwhelan@usenergyservices.com.