HOUSTON -- Apparently one “July Massacre” is not enough for the central planners in Washington. The “New July Massacre” is underway as a veritable blitz of negative stories, government intervention and jawboning besieged the oil and natural gas markets in the past few days.   The onslaught seemed to reach a peak on Tuesday. 

An interview with a high official regulator and an SEC filing by the largest natural gas ETF delivered a one-two punch to holders of that NatGas ETF.   By the time the dust had cleared, traders saw a significant downward effect in the natural gas arena.

Sporting his now familiar white “mullet” hairdo, Commodities Futures Trading Commission (CFTC) commissioner Bart Chilton appeared with CNBC’s Maria Bartiromo Tuesday. He as much as confirmed that the current administration has its sights on “speculators” in the energy complex, but his comments were not just focused on position limits in the futures markets for oil and natural gas. He also mentioned the metals complex as well, even though the metals ETFs mostly do not use futures. They stockpile physical metal instead.

Watch the chilling interview at this link:  

http://www.cnbc.com/id/15840232?video=1174467961&play=1

Below are most of commissioner Chilton’s remarks.

“I think there is support now in the CFTC for going ahead and trying to reach the right balance to insure that we don’t go too far and prohibit trading when it’s needed – you need speculators in these markets as you know – but we also want to make sure that it’s not excessive and uneconomic and that consumers are paying a fair price for commodities that they purchase.” 

“We’ve had a 60% increase (in oil) when we’ve had the highest supply and the lowest demand in 10 years. Now we’ve seen that drop in the last few days but still it seems uneconomic and something is going on in these markets.”

“(Changing the position limit rules) is one way that we have – a tool in our arsenal, if you will, to look at making sure that consumers aren’t paying more than they should for oil and for other things – break, milk, etc.”

“It’s not actually a proposal yet, Maria (Bartiromo of CNBC), we’re considering the public view, which is why we are going to have these hearings. Who would think that the government would actually ask what to do before we actually do it? So, we will listen to what people have to say, make sure we are not going too far one way or another, put (out) a proposal for comment and then hopefully this fall have something in place that will make sense both to market participants and to consumers.”

“I think the futures exchanges by and large in the United States have done a very good job of helping to regulate this market on our behalf, but we’re the government. We’re the ones that have the final word for looking out for consumers.”

“I think at some level there is a limit to the amount of positions that a trader should be able to have. I’m not sure what that level is – if it’s 51% of a market, if it’s an actual number of trades, but at some level enough is enough and that’s the type of thing we are going to be looking at – at these hearings this summer.” 

“Absolutely we need to be careful of that (not putting small traders and shops out of business). It seems to me that that’s why these hearings are important. We are going to get the public input from both small and large entities to insure that we’re not going overboard either too far right or too far left and I think we can do that.”

“The markets have operated efficiently and effectively for a hundred years and I’m sure they will continue to do so, but every once in a while we need a little bit of tweaking. And I think last year if you ask consumers they’ll say something was wrong in these markets and they may need some tweaking now.”

“The public reports that you can get at CFTC.GOV - at our website – are very helpful to traders but you almost have to have an economics degree to read some of them and what we are going to do is add transparency – break out the traders more so you’ll be able to see what types of entities are actually in these markets and what percentages that they are, … and that’s not just for the energy sector, but that’s also for the metals complex.” 

“I think if we add transparency it will be helpful for consumers and you won’t have to have a PhD to understand these reports in the future. We may need to do more, but this is a good first step.” 

*** 

The Chilton interview came on the heels of a market halt for United States Natural Gas Fund (UNG) as they issued a filing with the SEC. A portion of that filing is below. The entire filing is at this link: 

http://www.sec.gov/Archives/edgar/data/1376227/000114420409036281/v154295_8k.htm

We’ll have limited commentary after that. 

Item 8.01    Other Events. 

On July 6, 2009, the United States Natural Gas Fund, LP (“UNG”) announced in a current report on Form 8-K that only 32,100,000 of its units registered with the Securities and Exchange Commission (the “SEC”) were available for purchase by UNG’s Authorized Purchasers.  As stated in its current prospectus, UNG creates and redeems units in blocks of 100,000 units called “Creation Baskets” and “Redemption Baskets,” respectively. Only Authorized Purchasers may purchase or redeem Creation Baskets or Redemption Baskets.

As of July 7, 2009, UNG issued all of the remaining outstanding units to its Authorized Purchasers.  As a result of these issuances, UNG will temporarily suspend the issuance of additional Creation Baskets until the SEC declares effective the registration statement on Form S-3 (333-159772), which was initially filed on June 5, 2009, and registers an additional 1,000,000,000 units.  This registration statement is currently subject to review and comment by the SEC, the Financial Regulatory Industry Association (“FINRA”) and the National Futures Association (“NFA”).

The suspension of the issuance of Creation Baskets has no effect on the ability of Authorized Purchasers to redeem baskets of units.  

UNG will issue a subsequent current report on Form 8-K to announce the effectiveness of the foregoing registration statement and its ability to resume offering Creation Baskets to its Authorized Purchasers. 

Any forward-looking statements in this current report are based on expectations of UNG management at this time. Whether or not actual results and developments will conform to management’s expectations and predictions, however, is subject to a number of risks and uncertainties, including the special considerations discussed in UNG’s prospectus, general economic, market and business conditions, changes in laws or regulations or other actions made by governmental authorities or regulatory bodies, and other world economic and political developments. UNG undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 

For further information, please call: 

United States Commodity Funds LLC

John Hyland   (510) 414-5153

(Emphasis added) 

***

In a case of sell-first-and-ask-questions-later, fearful UNG holders sold after trading resumed, driving down the NatGas ETF and also affecting electronic trading of NatGas itself. 

What is ironic, if one actually reads the release, is that UNG has just said that it will not issue new shares of the fund until the SEC approves its pending prospectus to increase the number of shares. While it can still redeem shares it cannot sell new shares, which means that if demand for UNG rises the existing shares could go into a premium condition, or a price that is higher than the underlying NAV. Why? Because the fund’s authorized market participants would be unable to sell newly-created shares to offset premiums in the share price. That’s until the SEC approves its pending registration prospectus.

In that sense, the UNG filing at the SEC should, repeat should, have resulted in investors bidding up UNG, knowing they could not issue new shares to shunt excess buying pressure. But combined with the CFTC commissioner’s comments, it had a reverse effect as traders and investors assumed that this administration intends to make life more difficult for investors who want to participate in ETFs, which use futures as a basis for their value. That, and probable confusion by some investors what the SEC filing actually meant.  

We’ll undoubtedly have more about this in future reports, but for now be very careful out there as the government is here to “help” us. We all remember last July when they did something similar, the time BMO’s Donald Coxe called the “July Massacre,” but that time it wasn’t as much in the open.

Compounding the facts was a rash of misinformed gibberish from sanctimonious “told you so” commentators late Tuesday on televised media. One particular commentator remarked that “UNG doesn’t work and never has.”   

Be careful

Those who heeded the advice to use out of the money puts for protection may end up glad they did, but once the public understands that UNG cannot issue new shares the long-side hedge funds may want to press the issue and try to cause a short squeeze.

It’s a dicey mix anytime the government tries to “tweak” the markets. If long UNG, we would reiterate the idea of using puts as an “insurance policy.” More conservative investors might move to the sidelines until the dust clears and the facts get more of a chance to surface. Eventually the truth will ooze to the top despite the talking head’s aversion to them. But meanwhile the ride might be bumpy in a not-so-fun sort of way. 

More traditional NatGas companies are also game for this trade and we’ll be eager to add them should they also get unreasonably pummeled in the government-caused confusion.

That’s all for now from Houston.   

In association with Brien Lundin’s highly-acclaimed Gold Newsletter