Natural Gas Fund Suspends New Offerings on Regulatory Concerns

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By Reg Curren and Asjylyn Loder

Aug. 12 (Bloomberg) -- United States Natural Gas Fund, the world’s largest exchange-traded fund in the fuel, will suspend offering new shares on concern that proposed federal regulations will prevent it from meeting its investment objectives.

The fund said today it won Securities and Exchange Commission approval to sell up to 1 billion new units, which would give the fund room to almost triple in size.

UNG, run by U.S. Commodity Funds LLC of Alameda, California, tries to track the performance of natural gas at Henry Hub in Erath, Louisiana, the delivery point for the future traded on the New York Mercantile Exchange.

“Our attorneys have told us the prospectus has become effective this morning,” John Hyland, the fund’s chief investment officer, said today in a telephone interview. The units would available for sale if regulators were to allow the fund access to enough natural gas investment products to meet its objectives or “as we make other arrangements,” he said.

John Nester, a spokesman for the commission, declined to comment.

The Commodity Futures Trading Commission, which regulates futures markets, heard testimony in July and August that commodity funds may be distorting energy prices. Commission Chairman Gary Gensler has said he believes that speculation contributed to a surge in crude oil to a record $147.27 a barrel.

Hyland said in a separate e-mail today that it would be imprudent for the fund to sell new units and purchase more Nymex or Intercontinental Exchange listed natural gas products “when we believe that CFTC may shortly mandate new limits.”

CFTC Rule

On July 27, the CFTC announced limits on the number of contracts investors can hold on the Intercontinental Exchange Inc.

The fund today said it will suspend offering “creation baskets,” which are blocks of 100,000 units, because of proposed regulatory changes that may prevent it from meeting its investment objectives.

UNG fell 10 cents, or 0.8 percent, to $12.73 in composite trading on the New York Stock Exchange at 11:01 a.m., down 54 percent this year.

Hyland testified before the CFTC on Aug. 5, saying that no conclusive studies proved his funds harm energy markets. Such allegations were “statistical gibberish.”

Hyland said that exchange-traded funds should be exempt from position limits because they aggregate demand from thousands of shareholders and passively reflect the price of commodities rather than pushing the price on way or the other.

The gas fund buys near-month natural gas contracts on Nymex and the ICE, and starts selling them about two weeks before the contracts expire.

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