The Return, Maybe, of New UNG Baskets (UNG)

United States Natural Gas (NYSE: UNG) has been accused of, and still appears to be, the tail that wags the dog in the world of speculative instruments and a single commodity market.  It is such a large portion of front-month contract trading that it has dominated trading on many days in the natural gas market. This ETF, actually an ETN, had effectively become a closed-end fund after it announced back in August that it would not resume offering “Creation Baskets” of its units and that it would make another filing when it planned to resume issuance.  A late-Friday SEC filing showed that UNG’s management has determined that it will resume offerings of Creation Baskets on September 28, 2009.  These offerings will be limited and will also be subject to some terms and conditions.

UNG’s prior basket issuance suspension was because it determined that at that time UNG could not invest the proceeds from such offerings in investments that would track its investment goal due to current and anticipated new regulatory restrictions.  This is because of the CFTC regulation, and it also noted new regulations from ICE and NYMEX. UNG’s management now believes that UNG will have the ability under limited circumstances to offer new creation baskets that can still meet its investment objective.

If management determines before the September 28 date that new circumstances have arisen that will prevent UNG from offering Creation Baskets, it will announce changes in circumstances as soon as practicable in an SEC filing.

The first condition is UNG’s acceptance of an authorized purchaser’s offer agreeing to sell to UNG specified investments that meet UNG’s investment objective ( over-the-counter swap contract).  The second condition is that management may decide to limit the issuance of creation baskets to a specified minimum or maximum number.  The third listed condition is that management may vary the terms and conditions of the investments to be delivered or arranged.  The last listed condition is that UNG’s management may decide to offer creation baskets only on particular days and whether it will offer creation baskets and the terms and conditions of such an offering for a specific day will be announced each day no later than the opening of trading in UNG’s units on the NYSE Arca.

The UNG management did acknowledge that the UNG units are trading at a premium to its net asset value.  It also noted that it is possible that even a limited resumption of creation activity could reduce or remove any premium over NAV.  There is also the formal warning in the filing: “Investors are cautioned that paying a premium over the NAV for UNG units can lead to additional losses for the investor in the event that the investor sells such units at a time when the premium is no longer present in the market price.” UNG also disclosed that payment of fees or other amounts in connection with these investments that exceed amounts currently paid may have the effect of increasing transaction-related expenses and result in increased tracking error.”

In short, the UNG is going to try to start issuing baskets and units again.  And it is telling you, “Caveat Emptor!”  The UNG is not tracking today.  Mid-day, Natural Gas is listed as being up $0.26 at $3.22.  That is already off of early highs, but the UNG is trading up only about 1% at $10.72.  The UNG has hit as high as $10.97 today.

JON C. OGG