10-K: United States Natural Gas Fund, LP 2023 Annual Report: Navigating Volatile Markets

The United States Natural Gas Fund, LP's 2023 annual report details a year of significant market volatility and a substantial decrease in the fund's net asset value.

Summary

• The United States Natural Gas Fund, LP (UNG) is a commodity pool aiming to mirror daily changes in natural gas prices at the Henry Hub, Louisiana, using futures contracts.
• UNG's investment objective is for its per share NAV to track the daily percentage changes in the price of the Benchmark Futures Contract, plus interest, less expenses.
• The fund invests primarily in natural gas futures contracts on the NYMEX and ICE Futures, and to a lesser extent, in other natural gas-related investments.
• UNG's NAV decreased by approximately 64.22% during 2023, closing at $20.36 per share, primarily due to a decline in natural gas prices.
• The Benchmark Futures Contract price decreased by approximately 43.82% over the year, ending at $2.514 per MMBtu.
• UNG's average daily total net assets were $1,041,866,566 in 2023, compared to $470,764,283 in 2022.
• UNG's total expenses were $10,505,425 in 2023, including management fees of $6,252,127 and brokerage commissions of $2,696,598.
• UNG's dividend and interest income was $46,665,419 in 2023, compared to $7,266,558 in 2022, due to higher interest rates.
• UNG exceeded NYMEX accountability levels during the year, holding a maximum of 46,245 Natural Gas Futures NG contracts, but no action was taken by the NYMEX.
• UNG effected a 1-for-4 reverse share split on January 23, 2024, which adjusted the share price and number of outstanding shares.

Sentiment

Score: 3

Explanation: The document presents a negative outlook due to the significant decrease in NAV and the volatile market conditions, despite some positive aspects like increased interest income and benchmark tracking.

Positives

• UNG's interest income increased significantly due to higher interest rates, partially offsetting losses from natural gas price declines.
• UNG's average daily change in NAV tracked its benchmark within the target range of plus or minus 10% over a 30-day period.
• UNG's actual total return outperformed its benchmark by 1.19% for the year ended December 31, 2023.

Negatives

• UNG experienced a substantial decrease in NAV due to a significant decline in natural gas prices.
• UNG's total expenses increased, including management fees and brokerage commissions.
• UNG exceeded NYMEX accountability levels during the year, which could lead to regulatory scrutiny.

Risks

• UNG's NAV is directly tied to the volatile natural gas market, which can lead to significant losses.
• The fund's performance may not perfectly correlate with the spot price of natural gas due to factors like contango and backwardation.
• Accountability levels, position limits, and price fluctuation limits set by exchanges can cause tracking errors.
• Risk mitigation measures imposed by FCMs can limit UNG's investments and cause tracking errors.
• OTC contracts expose UNG to counterparty credit risk and valuation uncertainties.
• Infectious disease outbreaks like COVID-19 can negatively affect the valuation and performance of UNG's investments.
• UNG could become leveraged if it has insufficient assets to meet margin or collateral requirements.
• UNG may temporarily limit the offering of Creation Baskets, which could cause its NAV to differ materially from its trading price.
• UNG may not be able to fully invest at prevailing rates in a rising rate environment until current investments in Treasury Bills mature.
• UNG may potentially lose money by investing in government money market funds.
• The failure or bankruptcy of a clearing broker or custodian could result in a substantial loss of UNG's assets.
• Cyber-attacks pose operational and information security risks.
• Climate change and greenhouse gas restrictions could negatively affect UNG's investment returns.
• USCF is the subject of class action, derivative and other litigation.

Future Outlook

UNG intends to continue to pursue its investment objective as described in the report, but the relationship between the market price of UNG's shares and changes in the spot prices of natural gas will likely continue to be impacted by contango and backwardation.

Industry Context

The report highlights the volatility in the natural gas market, influenced by factors such as the COVID-19 pandemic, the Russia-Ukraine war, and global supply and demand dynamics. The report also notes the increasing influence of international demand and events on U.S. natural gas prices.

Comparison to Industry Standards

• UNG's performance is compared to its benchmark, the daily changes in the price of the Benchmark Futures Contract, and the report notes that UNG's average daily change in NAV tracked its benchmark within the target range of plus or minus 10% over a 30-day period.
• The report also compares UNG's performance to other energy commodities and investment asset classes, noting that natural gas has historically not demonstrated a strong correlation with equities or bonds over long periods of time.
• The report notes that the natural gas market has experienced periods of both contango and backwardation, which can impact the total return of an investment in UNG's shares relative to a hypothetical direct investment in natural gas.

Legal Proceedings

• UNG and USCF were named as defendants in the Optimum Strategies Action, which was dismissed by the court.
• USCF and USO reached a settlement with the SEC and CFTC regarding certain matters, resulting in a cease-and-desist order and a $2.5 million penalty.
• USCF, USO, and certain individuals are defendants in the In re: United States Oil Fund, LP Securities Litigation, a consolidated class action.
• USCF, USO, and certain individuals are defendants in the In re United States Oil Fund, LP Derivative Litigation, a consolidated derivative action.
• USCF, USO, and certain individuals are defendants in the Mehan Action, a derivative action.

Related Party Transactions

• UNG pays management fees to USCF, its general partner.
• USCF pays the fees of the Marketing Agent and BNY Mellon for their services to UNG.
• UNG pays licensing fees to the NYMEX.
• UNG pays a portion of the fees and expenses of the independent directors of USCF.

Stakeholder Impact

• Shareholders experienced a significant decrease in the value of their investment due to the decline in natural gas prices.
• Authorized Participants may be affected by changes in the market price of shares and the ability to create or redeem baskets.
• The report provides transparency to stakeholders regarding the fund's performance and operations.

Next Steps

• UNG will continue to monitor market conditions and regulatory requirements.
• UNG will continue to invest in Natural Gas Interests to the fullest extent possible without being leveraged.
• UNG will continue to manage its portfolio to track the Benchmark Futures Contract.

Key Dates

Keywords

natural gas, futures contracts, commodity pool, UNG, net asset value, NYMEX, ICE Futures, contango, backwardation, OTC swaps, market volatility, tracking error, position limits, FCM, USCF