Natural gas is an energy product that takes no prisoners. Since the start of futures trading on the NYMEX division of the CME in 1990, the price has traded as low as $1.02 and as high as $15.65 per MMBtu. Natural gas traded above $10 per MMBtu in 2003, 2005, and 2008. In January 2022, as the February NYMEX contract rolled into March, a short squeeze took the price of energy commodities to an all-time high level since 2008, when it reached $7.346 per MMBtu. At the end of last week, the price of nearby NYMEX futures settled at just over $5 per MMBtu.
The price variation on the natural gas futures market can be as volatile as the raw material when it escapes from the earth’s crust. Over the past thirty-two years, the market has seen price explosions and implosions. The natural gas market has undergone significant changes in recent years. US reserves and production have increased, and the demand side of the fundamental equation has reacted with the emergence of vertical demand markets. The natural gas market broke higher after hitting lower highs and lower lows from 2008 to June 2020.
The ProShares Ultra Bloomberg Natural Gas (BOIL) product and its bearish counterpart (KOLD) track the volatile natural gas futures market and are trading, not investment, tools for market participants.
Natural Gas Recovers From June 2020 Low
Natural gas has been very volatile over the past few months, but the energy commodity has been in an uptrend since June 2020, making lows and highs.
The NYMEX natural gas futures weekly chart highlights the dizzying price swing since June 2020 at $1.432 per MMBtu, the lowest price since 1995. At the $4.917 per MMBtu level, the price was higher at 3.4 times the level at the lowest. Additionally, in March 2021, nearby NYMEX natural gas futures traded at a high of $2.887 per MMBtu, more than $2 below the current price.
The bull market remains firmly intact in the natural gas futures arena.
The natural gas futures arena has shifted from a purely domestic market and U.S. energy policy has flip-flopped
NYMEX natural gas futures contracts reflect the delivery price at the Henry Hub in Erath, Louisiana. NYMEX futures contracts are a benchmark and hedging tool for US natural gas producers and consumers. Delivery prices to other US and foreign locations trade at significant discounts or premiums over the Henry Hub price, and these days other locations are at much higher levels.
In Europe and Asia, natural gas prices have soared. Russia’s invasion of Ukraine has only pushed prices higher as supply fears have increased dramatically. Last week, natural gas prices in Europe hit a new high.
The US natural gas market has undergone a series of substantial changes in recent years. Massive discoveries of quadrillion cubic feet of reserves in the U.S. Marcellus and Utica shale regions drove the NYMEX futures price higher and lower from 2008 through June 2020. Technological advancements hydraulic fracturing to extract gas from onshore crude has reduced production costs, putting further downward pressure on prices.
Since necessity is the mother of invention, the technology of turning gas into liquid form for export to other countries where prices are significantly higher has broadened the horizon of natural gas beyond the grid. from American pipelines, liquefied natural gas now travels across the oceans to the points of consumption. While the United States has plenty of reserves to increase production, a shift in energy policy stands in the way of expanding the industry. Additionally, US policy is exacerbating global shortages in the face of Russian sanctions and retaliatory measures.
The United States is addressing climate change by supporting alternative and renewable fuels and inhibiting hydrocarbon production and consumption. In 2021 and 2022, the Biden administration banned drilling and fracking on energy-rich federal lands in Alaska and did not renew leases in other areas. As the U.S. natural gas market grew into a growing international energy commodity, the administration erected roadblocks that limited growth. Recent world events are now impacting natural gas prices in the United States as the market is global and cannot revert to a purely domestic market.
The end of the 2021/2022 peak season with stocks at low levels and global demand exploding
Natural gas prices in Europe and Asia have increased in recent months. A few months ago, Cheniere Energy (LNG), a leading producer and exporter of LNG, told CNBC reporters that the company had been sold short of LNG for many years under long-term contracts. term with Asian buyers.
Meanwhile, natural gas at nearly $5 per MMBtu in the US is significantly higher in late winter and injection season typically begins in March.
The chart shows natural gas inventories in storage in the United States stood at 1.643 trillion cubic feet for the week ending Feb. 25. Inventories were 11.6% below last year’s level and 13.4% below the five-year average at the end of February. In 2020 and 2021, the withdrawal seasons ended with stocks at 1,986 and 1,750 tcf, respectively. Natural gas inventories were below that level on Feb. 25, with global demand exploding and rising every day.
Russia makes natural gas explosive
On February 24, Russia invaded Ukraine, and the United States and Europe slapped Russia with a host of sanctions. Germany made a one-hundred-eighty-degree political turn when it announced its intention to strengthen its military to counter the growing Russian threat against NATO countries and Germany.
Russia will retaliate with sanctions, export bans, embargoes. Russia supplies Germany and Europe with most of its natural gas needs. The shortages and rising prices of the past few months may pale in comparison to what’s on the horizon as Russia strategically tightens or even cuts supplies to Western Europe.
The situation in Europe is impacting the US market, as Europe will look to US LNG suppliers for its needs. Over the past few weeks and months, the Biden administration twisted arms in Asia to divert contracted natural gas supplies to European consumers to confront Russian control.
The bottom line is that the Russian war in Ukraine has made the NYMEX natural gas futures arena with delivery to the Henry Hub an even more international market, pushing US prices higher due to world events.
Volatility creates trading opportunities – BOIL and KOLD rise and fall with energy commodity futures
Volatility creates trading opportunities, but it can be a nightmare for passive investors. Anyone with a passive approach to trading or investing should not approach the natural gas arena.
I expect the sky-high volatility to continue and increase over the coming weeks and months. We enter the offseason with demand at the highest price in years. The last time natural gas futures exceeded $4.80 per MMBtu in March was in 2010, a dozen years ago.
The most direct route to a risk position in natural gas is the highly volatile and leveraged natural gas futures market. At about $5 per MMBtu, a natural gas futures contract was worth about $50,000. An initial margin of $2,750 per contract allows a market participant to control $50,000 of natural gas for a good faith deposit of 5.5%. Market participants looking for leverage without needing to dip a toe into the futures arena can turn to the ProShares Ultra product Bloomberg Natural Gas (BOIL) and its bearish counterpart (KOLD). The main disadvantage is that natural gas trades 24 hours a day, from Sunday evening to Friday evening, while BOIL and KOLD are only available for trading during US exchange hours.
At the $44.11 level at the end of last week, BOIL had $181.968 million in assets under management. The product averages over 3.18 million shares each day and BOIL charges a management fee of 0.95%. At $22.45, bearish product KOLD had $194.201 million in assets under management and trades an average of over 3.0 million shares each day. KOLD charges the same expense ratio of 0.95%. The fund summary highlights that BOIL seeks to generate twice the daily performance of the Bloomberg Natural Gas sub-index, linked to the Henry Hub price:
The ProShares Ultra Bloomberg Natural Gas targets daily investment results, before fees and expenses, that correspond to two times (2x) the daily performance of the Bloomberg Natural Gas Sub-Index.
Source: BOIL Product Fund Summary (Histogram)
KOLD’s fund summary is the opposite of BOIL’s. Nearby April natural gas futures fell from $4.34 on March 1 to a high of $5.045 per MMBtu on March 4 or 16.2%.
Around the same time, BOIL fell from $34.89 to $46.11 per share or 32.2%. BOIL produced a return slightly below twice the April natural gas futures price, but it provided a leveraged return.
BOIL and KOLD are short term tools. Leverage has a price; decrease in time. The natural gas market has undergone a series of changes in recent years. Massive discoveries in the US have increased supply and LNG has extended the reach of the energy product beyond the US pipeline network, making it a global market. US energy policy has weighed on supplies, and Russia threatens to alter the fundamental international equation.
Expect the dizzying volatility to continue, with downtrends and explosive bounces. In the meantime, I expect the market to trade with a bullish bias.
The volatility of natural gas can be dangerous. BOIL and KOLD are useful tools, but market participants should only use them with a risk-reward plan that includes a time horizon to account for the time decay of the leveraged product.