In March, exchange-traded products (ETPs) tracking natural gas futures vastly outperformed the broader exchange-traded product (ETP) universe. Over the course of the month, natural gas ETPs surged between 14-18%, depending on their underlying benchmark. The price of natural gas has enjoyed a swift resurgence as the natural gas spot price has risen 95% over the past year. However, given that the futures curve has been in contango, natural gas futures have only partially participated in the spot price rally, rising 26% over the same time frame as measured by the DJ-UBS Natural Gas index. In general, natural gas fuels power-generating plants, industrial complexes, and households. In the month of March prices rose due to increased household heating demand as cold weather lingered in major US cities such as New York and Chicago, which rely heavily on natural gas to supply heat and power needs.
Natural gas has been the subject of intense interest and debate over the past few years as newfound technologies have been developed to exploit previously inaccessible resources. In particular, the adoption of "fracking" technology has enabled natural gas to be harvested in cheaper and more efficient ways--increasing supply and driving down prices. In recent years, the development of vast shale natural gas reserves in the US has motivated natural gas producers to expand production. According to the US Energy Information Administration, the US possesses 2.5 trn cubic feet of technically recoverable natural gas resources, of which 33% is held in previously inaccessible shale rock formations. Currently, shale gas represents 25% of total US gas production up from near 0% a decade ago and is expected to represent 50% of total US gas production by 2035. The immense shale deposits have attracted foreign investment as well, most recently from French and Chinese companies eager to benefit from the resource boom. Despite the fact that natural gas is trading at record discounts to crude oil and in the context of falling rig counts, natural gas production (measured in billions of cubic feet per day) has continued to increase, rising 8% in 2011 and 5% in 2012 according to the Energy Information Agency. Following the US example, other countries are currently exploring the use of "fracking" technologies to unlock their own domestic 'shale boom.' Russia has been at the forefront of this movement as Russian oil companies such as Lukoil seek to apply the same techniques to the Siberian deposits of unconventional oil.
At the other end of the performance spectrum, volatility continues to ebb amidst continued investor confidence and a bullish atmosphere. During the month of March, volatility-related ETPs in Europe lost between 9%-17%. Much of the downturn in volatility can likely be attributed to the continued equity rally as stock market volatility tends to decline in the face of rising share prices.
Volatility is commonly modelled by the VIX index, which seeks to capture changes in expected future volatility. Expected volatility, thus, serves as a proxy for market uncertainty, affording the VIX Index the moniker of "The Fear Index". When investors are fearful and uncertain, they will demand higher expected returns and thus pay less for assets in the present. This relationship between volatility and share prices can make vehicles that follow the VIX good diversifiers for equity-based portfolios.
Some assets, like commodities and government bonds, show near-zero correlations to stocks, but volatility has a strong negative correlation with stock prices. Unfortunately, volatility is also strongly mean-reverting and as such will theoretically produce zero long-term return.
