Natural gas is a fickle beast. One week, a polar vortex sends prices screaming higher, and the next, a warm front in the Midwest makes the commodity trade like it’s going out of style. If you’ve looked into trading this volatility without opening a messy futures account, you’ve likely bumped into the United States Natural Gas Fund LP. It’s the big player. Known by its ticker, UNG, this exchange-traded security is designed to track the daily price movements of natural gas. But here is the thing: what you see on the news regarding "gas prices" isn't always what you get in your brokerage account.
People lose money here. A lot of it.
The United States Natural Gas Fund LP doesn't actually own physical gas. It isn't sitting on massive underground salt caverns filled with vapor in Louisiana. Instead, it plays in the futures market, specifically the Henry Hub New York Mercantile Exchange (NYMEX) contracts. This distinction matters more than most retail investors realize because of a mathematical monster called contango. When the next month's contract is more expensive than the current one, the fund loses "value" just by rolling its position forward. It’s like running on a treadmill that’s slightly tilted against you. You’re working hard, but you’re slowly sliding backward.
The Mechanical Reality of UNG
Let’s talk about how this thing actually functions under the hood. The fund’s primary goal is to reflect the daily changes, in percentage terms, of the price of natural gas delivered at the Henry Hub. It does this by holding near-month futures contracts. When those contracts approach expiration, the fund managers have to sell them and buy the next month’s contracts. This is the "roll."
If the market is in "backwardation"—where the immediate price is higher than the future price—the fund actually gains a little bit of a "roll yield." It’s great. But natural gas markets spend a massive amount of time in contango.
Imagine you buy a loaf of bread for $2 today. You need to replace it next month, but the "future" loaf costs $2.10. To stay in the "bread game," you sell your $2 loaf and pay $2.10 for the new one. You still have one loaf of bread, but you’ve lost 10 cents in the transaction. Do this every month for a year, and even if the price of bread stays "flat" at $2 on the news, your investment has evaporated. That is the story of the United States Natural Gas Fund LP over long horizons.
Take a look at the long-term chart. It’s a series of brutal declines interrupted by violent, short-lived spikes. Since its inception in 2007, UNG has undergone multiple reverse stock splits. Why? Because the share price kept drifting toward zero due to these rolling costs. A 1-for-4 split here, a 1-for-10 there. It keeps the ticker alive, but it doesn’t bring back the capital lost to the math of the futures curve.
Why Volume Still Pours In
If it's such a "leaky bucket," why is the liquidity so high? Because for a day trader or a sophisticated hedge fund, it’s a phenomenal tool. If you think a hurricane in the Gulf is going to shut down production for 48 hours, UNG gives you instant, liquid exposure. You don't have to call a broker to clear futures. You just click "buy" in your Robinhood or Schwab account.
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It’s about the "now."
The United States Natural Gas Fund LP is a tactical instrument, not a "buy and hold" retirement strategy. If you put UNG in your 401(k) and look at it in five years, you will almost certainly be disappointed, even if natural gas is slightly more expensive then than it is today.
Taxes and the K-1 Headache
Here is something that catches people off guard every March: UNG is a Limited Partnership (LP). It isn't a standard ETF like SPY or QQQ. Because it’s structured as a Delaware limited partnership, you don't get a 1099-B. You get a Schedule K-1.
K-1s are notoriously annoying. They often arrive late, sometimes in late March or early April, forcing investors to file for tax extensions. Furthermore, because of the "60/40 rule" for Section 1256 contracts, 60% of capital gains are taxed at the long-term rate and 40% at the short-term rate, regardless of how long you held the shares.
Some people love this. Some hate it. Most just find it confusing.
If you’re trading this in a taxable account, you're signing up for a more complex tax season. There are "ETF-like" alternatives that use different structures to avoid the K-1, such as the United States 12 Month Natural Gas Fund (UNL), which spreads its bets across 12 months of contracts to minimize the impact of contango. But UNL doesn't have the same "pop" or liquidity as the United States Natural Gas Fund LP.
The Ghost of 2022 and the Freeport Ripple
To understand how sensitive this fund is, we have to look at the Freeport LNG explosion in June 2022. Freeport was a major export terminal in Texas. When it went offline due to a fire, it meant that natural gas that was supposed to be shipped to Europe was suddenly stuck in the U.S.
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Supply glut.
Prices tanked instantly. The United States Natural Gas Fund LP fell off a cliff. It didn't matter that global prices were high; the fund tracks the domestic price at the Henry Hub. This highlights a critical risk: UNG is hyper-sensitive to U.S. infrastructure. A pipeline leak in Pennsylvania or a storage facility issue in Louisiana moves the needle more than a war on the other side of the planet might—unless that war directly affects how much gas we can ship out.
Managing the Volatility
So, how do you actually use this thing without getting burned? First, you have to watch the weather. Seriously. The "Weather Derivatives" traders are some of the smartest people in the world, and they move natural gas prices based on proprietary models of how cold it will be in Chicago three weeks from now.
If you aren't watching the National Oceanic and Atmospheric Administration (NOAA) 6-10 day forecasts, you’re flying blind.
Second, watch the inventory reports. Every Thursday at 10:30 AM Eastern, the Energy Information Administration (EIA) releases the "Weekly Natural Gas Storage Report." It shows how much gas is in the ground compared to the five-year average. If the "build" is bigger than expected, prices drop. If the "draw" is deeper than expected, UNG might gap up.
It’s a game of expectations.
Common Misconceptions About UNG
- "It tracks the price of gas at the pump." No. That’s gasoline. Natural gas is what heats homes and runs power plants.
- "If gas goes up 10% this year, UNG goes up 10%." Almost never. Because of the roll costs, UNG will likely underperform the "spot" price of gas significantly over a year.
- "It's a safe way to play the energy transition." Maybe, but it’s a high-maintenance one. Natural gas is the "bridge fuel," but the United States Natural Gas Fund LP is a trading vehicle, not a long-term investment in the energy sector.
The Role of Export Demand
In the last few years, the U.S. has become a massive exporter of Liquefied Natural Gas (LNG). This has started to link domestic prices more closely to the global market, but the link is constrained by how many ships can leave our ports.
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The United States Natural Gas Fund LP remains a reflection of the local balance.
If we produce more than we can burn or ship, prices stay low. Even if Asia is paying five times as much for gas, the Henry Hub price (and thus UNG) won't care if the "pipes" to get it there are full. This "bottleneck risk" is a nuance that separates the pros from the amateurs in this space.
Strategy and Timing
Most successful users of UNG aren't trying to catch a multi-year trend. They are looking for "mean reversion." When gas gets historically cheap—say, under $2.00 per MMBtu—people start looking for a floor. They buy UNG expecting a cold snap or a production cut.
But "cheap" can stay "cheap" for a long time.
Natural gas has a "cost of production" floor, but that floor moves as fracking technology gets more efficient. What was a "death level" for producers ten years ago is now a profitable price point for some in the Permian Basin.
Don't buy the United States Natural Gas Fund LP just because it "looks low." It can always go lower through the magic of the reverse split.
Actionable Next Steps for Investors
- Check the Curve: Before buying UNG, go to the CME Group website and look at the "Natural Gas Futures Curve." If the future months are significantly higher than the current month, you are starting in a hole.
- Evaluate Your Time Horizon: If you plan to hold for more than two weeks, ask yourself why. Are you prepared for the 2% to 3% monthly decay that often occurs during periods of high contango?
- Prepare for the K-1: If you don't want to deal with a complex tax return, look for "No K-1" alternatives like the First Trust Natural Gas ETF (FCG), which holds stocks of companies that produce gas rather than the futures contracts themselves. They behave differently, but they are easier on your accountant.
- Watch the EIA Thursday Reports: Never enter a large position at 10:25 AM on a Thursday. Wait for the data to digest. The "initial reaction" to storage numbers is often a head-fake.
- Set Hard Stops: Because natural gas can move 5% to 10% in a single day, "hoping" for a recovery is a recipe for a blown-out account. Use stop-loss orders to protect your capital.
The United States Natural Gas Fund LP is a sharp tool. In the hands of someone who understands the futures curve and the seasonal cycles of energy demand, it’s an effective way to profit from one of the world's most volatile commodities. In the hands of a casual investor who treats it like a tech stock, it’s a wealth-destruction machine.
Respect the math of the roll, keep an eye on the weather in the Northeast, and always remember that you are trading a contract, not a company. That distinction is the difference between a winning trade and a tax-loss harvest.