10-Q: UNG Reports Strong Benchmark Tracking Amid Asset Decline

United States Natural Gas Fund, LP (UNG) reported improved net income and strong benchmark tracking for the first half of 2025, despite a significant reduction in total assets and shares outstanding.

Summary

• Total assets decreased significantly to $375,684,519 as of June 30, 2025, from $790,024,428 at December 31, 2024.
• Partners' capital also saw a substantial decline to $360,537,619 from $743,835,423 over the same period.
• Limited Partner shares outstanding decreased to 23,546,103 as of June 30, 2025, from 44,146,103 at December 31, 2024.
• Net asset value (NAV) per share decreased to $15.31 from $16.85.
• Net income for the six months ended June 30, 2025, significantly increased to $86,400,918, compared to $9,506,807 for the same period in 2024.
• Realized gains on closed commodity futures contracts rose to $186,693,689 for the first half of 2025, up from $81,395,100 in 2024.
• The fund's NAV total return for the six months ended June 30, 2025, was (9.14)%, outperforming its Benchmark Futures Contract's estimated total return of (10.21)% by 1.07%.
• Average daily tracking difference for the 30-valuation days ended June 30, 2025, was 0.008% (0.8 basis points), well within the +/10% target.
• Natural gas futures prices decreased by approximately (4.87)% from December 31, 2024 ($3.633 per MMBtu) to June 30, 2025 ($3.456 per MMBtu).
• The fund redeemed 19,400,000 shares (194 baskets) during the second quarter of 2025.

Sentiment

Score: 4

Explanation: While the fund demonstrated strong operational performance by outperforming its benchmark and increasing net income, the significant decline in total assets and shares outstanding indicates a substantial outflow of capital, which is a major concern for an investment vehicle. The underlying commodity also saw a price decline. Ongoing legal proceedings against the general partner for a related fund add a layer of reputational risk.

Positives

• Net income for the six months ended June 30, 2025, significantly increased to $86,400,918, up from $9,506,807 in the prior year period.
• The fund's actual total return of (9.14)% for the six months ended June 30, 2025, outperformed its Benchmark Futures Contract's estimated total return of (10.21)% by 1.07%.
• The fund maintained excellent tracking performance, with an average daily difference of 0.008% (0.8 basis points) against its benchmark for the 30-valuation days ended June 30, 2025, well within its +/10% target.
• Total commissions accrued to brokers decreased to $466,776 for the six months ended June 30, 2025, from $1,420,343 in the prior year, indicating reduced trading costs.
• Interest and dividend income earned on cash and cash equivalents exceeded expenses, contributing positively to the fund's net yield and outperformance.

Negatives

• Total assets decreased by over 50% from $790,024,428 at December 31, 2024, to $375,684,519 at June 30, 2025.
• Partners' capital experienced a substantial decline from $743,835,423 to $360,537,619 over the six-month period.
• Limited Partner shares outstanding decreased significantly from 44,146,103 to 23,546,103, reflecting substantial redemptions.
• The net asset value per share decreased to $15.31 from $16.85, and the market value per share also declined.
• The natural gas futures market experienced a price decrease of approximately (4.87)% over the six months ended June 30, 2025.

Risks

• Contango and backwardation, natural market forces, may impact the total return on an investment in the fund's shares relative to a hypothetical direct investment in natural gas.
• The fund may experience tracking error if it buys or sells contracts at prices other than the closing settlement price, or if its Other Natural Gas-Related Investments do not closely track the Benchmark Futures Contract.
• Regulatory accountability levels and position limits (e.g., NYMEX, ICE Futures, CFTC Part 150) could inhibit the fund's ability to invest in the Benchmark Futures Contract, potentially causing tracking error.
• Market volatility due to natural disasters, public health disruptions (e.g., COVID-19), international armed conflicts (e.g., Russia-Ukraine war, Middle East conflicts), tariffs, trade barriers, global/local recessions, and acts of terrorism could negatively impact commodity prices and investment values.
• Interest rate risk may prevent the fund from fully investing at prevailing rates or lead to losses if fixed income securities are sold at a loss due to rising rates.
• Inflation risk could erode the value of the fund's cash and Treasury investments, as inflation rates remain above the Federal Reserve's 2% target.
• Investing in government money market funds carries a risk of loss, as there is no guarantee they will maintain a $1.00 per share value and are not FDIC insured.
• Credit risk exists with counterparties (clearinghouses, FCMs, OTC swap counterparties), and the insolvency of an FCM or custodian could result in substantial loss of assets.
• Liquidity risk may arise if daily limits on futures contracts prevent prompt liquidation of positions, or if highly customized swap transactions increase illiquidity.
• The fund may terminate if it can no longer foreseeably meet its investment objective or if its aggregate net assets make continued operation unreasonable, potentially leading to liquidation and loss of investment.

Future Outlook

The fund anticipates that interest rates may continue to stagnate in the near future, and that fees and expenses paid by the fund may continue to be lower than interest earned, potentially leading to outperformance of its benchmark. The fund also notes that increasing demand for LNG, new export facilities, and potential new demand for natural gas to power AI data centers may lift natural gas prices. A potential resolution to the Russia-Ukraine war could ease international price pressure on natural gas.

Management Comments

• The investment objective of UNG is for the daily changes in percentage terms of its shares per share net asset value (NAV) to reflect the daily changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana, as measured by the daily changes in the price of a specified short-term futures contract called the Benchmark Futures Contract, plus interest earned on UNG’s collateral holdings, less UNG’s expenses.
• USCF believes that market arbitrage opportunities will cause daily changes in UNG’s share price on the NYSE Arca on a percentage basis to closely track daily changes in UNG’s per share NAV on a percentage basis.
• USCF further believes that the daily changes in prices of the Benchmark Futures Contract have historically tracked the daily changes in the spot price of natural gas.
• USCF believes that the net effect of these relationships will be that the daily changes in the price of UNG’s shares on the NYSE Arca on a percentage basis will closely track the daily changes in the spot price of natural gas on a percentage basis, plus interest earned on UNG’s collateral holdings, less UNG’s expenses.
• USCF anticipates that interest rates may continue to stagnate over the near future. It is anticipated that fees and expenses paid by UNG may continue to be lower than interest earned by UNG. As such, USCF anticipates that UNG could possibly outperform its benchmark so long as interest earned is greater than the fees and expenses paid by UNG.

Industry Context

The natural gas market experienced volatility and a price decrease during the first half of 2025, influenced by factors such as increased rig counts, lower natural gas inventories due to a cold winter, and growing demand for LNG and potential AI data center power. Geopolitical events like the Russia-Ukraine war continue to impact global natural gas supply-demand dynamics, with potential for easing international price pressures if Russian supply returns. The fund operates within a highly regulated commodity futures market, subject to accountability levels and position limits, and faces inherent risks from market forces like contango and backwardation.

Comparison to Industry Standards

• The fund's tracking performance, with an average daily difference of 0.008% (0.8 basis points) against its benchmark, demonstrates strong adherence to its stated objective of tracking within +/10% of the Benchmark Futures Contract's daily changes.
• The fund's outperformance of its benchmark by 1.07% for the six months ended June 30, 2025, is a positive indicator of its operational efficiency, particularly in managing expenses relative to interest income.
• The filing provides correlation matrices comparing natural gas price movements to other energy commodities (crude oil, heating oil, unleaded gasoline) and major non-commodity asset classes (large cap U.S. equities, U.S. government bonds, global equities) over 1-year and 10-year periods, indicating natural gas has historically not shown strong long-term correlation with equities or bonds.
• The fund's general partner, USCF, also manages other related public funds such as the United States Oil Fund, LP (USO), United States 12 Month Oil Fund, LP (USL), United States Gasoline Fund, LP (UGA), United States 12 Month Natural Gas Fund, LP (UNL), United States Brent Oil Fund, LP (BNO), United States Commodity Index Fund (USCI), and United States Copper Index Fund (CPER), suggesting a consistent management approach across commodity-focused ETFs.

Legal Proceedings

• The General Partner (USCF) and a related fund (USO) settled SEC and CFTC investigations on November 8, 2021, resulting in cease-and-desist orders and civil monetary penalties totaling $2,500,000.
• A putative class action, 'In re: United States Oil Fund, LP Securities Litigation,' is pending against USCF, USO, and individuals, alleging violations of the 1933 Act and Exchange Act related to disclosures during extraordinary market conditions in 2020. A motion to dismiss has been filed.
• A derivative action, 'Mehan Action,' is pending against USCF, USO, and individuals, alleging breach of fiduciary duties related to 2020 disclosures. Proceedings are stayed pending the outcome of the 'In re: United States Oil Fund, LP Securities Litigation'.
• Consolidated derivative actions, 'In re United States Oil Fund, LP Derivative Litigation,' are pending against USCF, USO, and individuals, alleging violations of the Exchange Act and common law claims. Proceedings are stayed pending the outcome of the 'In re: United States Oil Fund, LP Securities Litigation'.

Related Party Transactions

• The fund pays its General Partner, United States Commodity Funds LLC (USCF), a management fee of 0.60% per annum of average daily total net assets of $1,000,000,000 or less, and 0.50% per annum for assets greater than $1,000,000,000.
• USCF pays the fees of the Marketing Agent (ALPS Distributors, Inc.) and BNY Mellon for administrative, custodial, and transfer agency services.
• The fund pays a licensing fee to the NYMEX equal to 0.015% on all net assets, shared with other related public funds managed by USCF (excluding BNO, USCI, CPER).
• The fund shares fees and expenses of the independent directors of USCF on a pro rata basis with other related public funds based on relative assets.

Stakeholder Impact

• Shareholders experienced a decrease in NAV per share and a significant reduction in the number of outstanding shares, indicating a substantial outflow of capital from the fund.
• The fund's strong tracking performance and outperformance of its benchmark are beneficial for remaining limited partners, as it indicates effective management of the investment objective.
• The General Partner, USCF, continues to receive management fees based on the fund's assets, though the decline in AUM would reduce the absolute fee amount.
• Brokers and Futures Commission Merchants (FCMs) saw a decrease in commissions due to a lower number of natural gas futures contracts being held and traded by the fund.

Next Steps

• The fund will continue to issue monthly account statements for shareholders, furnished to the SEC on Form 8-K and posted on its website.
• Management will continue to monitor exposure to market and counterparty risk through financial, position, and credit exposure reporting controls and procedures.
• The fund will continue to assess the creditworthiness of each potential or existing counterparty to OTC swaps.

Key Dates

Recommendation

While the fund demonstrated excellent tracking performance and even outperformed its benchmark due to effective management of expenses versus interest income, the significant decline in total assets and shares outstanding suggests a strong negative investor sentiment or a shift away from this specific product. For existing investors who seek exposure to natural gas and are satisfied with the fund's ability to meet its tracking objective, holding may be appropriate. However, the shrinking asset base and the ongoing legal proceedings involving the general partner for a related fund (USO) present concerns that new investors should carefully consider before initiating a position.

Keywords

Natural Gas, UNG, Commodity Pool, Futures Contracts, ETF, Energy, Henry Hub, NYMEX, SEC Filing, 10-Q, Commodity Trading, Investment Fund