Natural gas is a combustible energy commodity, and its price action in the futures market (NG1:COM) can be equally explosive and implosive. In 2022, Russia’s invasion of Ukraine caused U.K. and Dutch natural gas futures to explode to record highs. In August 2020, U.S. natural gas futures prices rose to the highest level since 2008 at just over $10 per MMBtu. However, the energy commodity ran out of upside steam over the past two years, with the price dropping below the $2 level before recovering.
As the natural gas market heads towards the peak demand season over the coming months, this could be an excellent time to put natural gas on your trading radar. The ProShares Ultra Bloomberg Natural Gas ETF (NYSEARCA:BOIL) provides leverage to the nearby U.S. natural gas futures price. Leverage comes at a steep price, as time decay erodes the ETF’s value when the price does not increase.
Natural gas is heading into the peak season
In November, the natural gas injection season during which U.S. inventories rise, will turn into the withdrawal season, as the winter is the peak season for the energy commodity’s demand. While prices tend to reach seasonal highs during the lead-up to winter, they remain under pressure in early September 2024.
Ten-Year U.S. NYMEX Natural Gas Futures Chart (Barchart)
The ten-year chart highlights the 84% plunge in nearby NYMEX natural gas prices from $10.028 in August 2022 to the February 2024 $1.60 continuous contract low.
Under the $2.30 level in early September, nearby natural gas futures remain far below the 2022 high.
Prices have stabilized above $2- The forward curve reflects the seasonality
After falling from the June 11 $3.254 high to the August 5 $1.991 per MMBtu low, natural gas has been above the $2 level.
Six-Month U.S. NYMEX Natural Gas Futures Chart (Barchart)
The six-month chart of NYMEX natural gas for October delivery illustrates that while prices are trending lower, they have remained above the $2 level since the August 5 low.
Natural Gas Forward Curve (Barchart)
Meanwhile, the forward curve shows that the price for January 2025 delivery at $3.405 is 50% above the October futures price of $2.270 per MMBtu. The steep forward premium for January 2025 delivery reflects natural gas’s seasonality during the peak heating season.
Inventories remain high – Above last year and the five-year average – Rig counts are down
High inventories have caused the current low natural gas prices.
EIA Natural Gas U.S. Inventories (EIA)
The chart shows that there were 3.347 trillion cubic feet of natural gas in storage across the United States as of the end of August 2024. Inventories were 6.6% above last year’s level and 10.7% above the five-year average for the middle of August. They are already above the end of the 2018 injection season level, which was at 3.234 trillion cubic feet. High inventory levels have weighed on U.S. natural gas prices.
Meanwhile, according to Baker Hughes (BKR), 95 natural gas rigs operated in North America for the week ending on August 30. This is nineteen fewer than the 114 rigs that operated at the same time in 2023. The low rig count and high inventory level present conflicting data for the path of least resistance for prices.
The war in Ukraine and the U.S. election could impact natural gas supplies and prices
Technological advances in U.S. natural gas production and processing over the past years have created an expanding market for liquid natural gas transported by ocean vessels worldwide.
In the past, natural gas exports were limited by the American pipeline network. LNG allows the energy commodity to travel the world in liquid form to regions with high prices. The world’s leading natural gas-producing countries are:
Natural Gas Production by Country (Statista)
The U.S. and Russia were the world’s top natural gas-producing countries in 2023, with Iran and China third and fourth. Europe depends on Russia’s natural gas exports for winter heating requirements. Meanwhile, the war in Ukraine has caused Russia to limit exports to “unfriendly” Western European countries supporting Ukraine. Fortunately, the European weather conditions during the 2023 and 2024 winters were temperate, causing U.K. and Dutch natural gas futures to decline from the 2022 record peaks. However, seasonally warm temperatures over the past two years are no guarantee that the 2024-2025 winter will not be colder, increasing heating and natural gas demand.
Over the past years, U.S. natural gas futures prices have become more sensitive to European and Asian prices because of the burgeoning LNG business. Therefore, a cold European winter causing higher prices and shortages could cause U.S. natural gas futures to rally over the coming months.
Meanwhile, natural gas is on the November U.S. ballot, and the future of U.S. energy policy depends on the election’s outcome. Democrats favor addressing climate change by limiting fracking and drilling, which will reduce oil and gas production. Republicans favor a return to the Trump administration’s “drill-baby-drill” and “frack-baby-frack” policies. The uncertainty of future U.S. energy policy could cause volatility in the natural gas futures arena over the coming weeks and months as the peak season and inventory withdrawals begin.
BOIL is a short-term bullish U.S. natural gas ETF product
Natural gas prices are low at under the $2.30 per MMBtu level, but the forward curve reflects the higher demand, with prices around the $3.40 per MMBtu level for January delivery. The most direct route for a risk position in the volatile U.S. natural gas market is the futures and futures options on the CME’s NYMEX division.
While the United States Natural Gas Fund ETF product (UNG) tracks short-term price action in the U.S. natural gas futures arena, the Ultra Bloomberg Natural Gas 2X ETF product turbocharges UNG’s price action.
At $9.38 per share, BOIL had nearly $600 million in assets under management. BOIL trades an average of over 11.276 million shares daily and charges a 0.95% management fee. The BOIL ETF is only appropriate for short-term, long risk positions as the leverage causes time decay. BOIL loses value when natural gas prices fall or remain stable. Therefore, any long positions in BOIL require time and price stops to avoid losses. Moreover, BOIL’s time decay causes periodic reverse-splits that destroy value and cause the leveraged ETF to become a dust collector in portfolios when market participants overstay their welcome in the product. These risks could cause you to lose all your capital. Please familiarize yourself with the special risks of leveraged ETFs by reading this SEC Bulletin.
The most recent rally in NYMEX natural gas futures for October delivery took the price 21.6% higher from $1.991 on August 5 to $2.421 on August 15.
Six-Month Chart of the BOIL ETF Product (Barchart)
As the chart shows, BOIL rose 35.8% from $8.13 to $11.04 per share over the same period, as the leveraged ETF outperformed the October futures on a percentage basis. Aside from value-destroying time decay, BOIL only trades when the stock market is open, while natural gas futures trade around the clock. BOIL can miss highs or lows when the stock market is closed.
Risk-reward and seasonality favor the upside in the U.S. natural gas arena, but the forward curve already reflects higher prices for the peak winter month. However, even though January 2025 prices are at the $3.40 level, they remain far below the August 2020 high, the highest level since 2008. Natural gas is one of the most volatile commodities, and it could attract lots of seasonal action as winter approaches. The ongoing war in Ukraine and the U.S. election could turbocharge the already volatile commodity over the coming weeks and months.
