HJBC
A few weeks ago, I wrote a bearish article on the ProShares Ultra Bloomberg Natural Gas ETF (NYSEARCA:BOIL), arguing investors should avoid the fund as it combines the worst of both commodity ETFs (‘futures roll decay’) and leveraged ETFs (‘volatility decay’).
As I wrote in my article, December to February is typically not a good time to be invested in natural gas “because investors tend to bet on the upcoming winter gas demand between September to November, and then by December, investors have a good sense of whether there is sufficient gas in storage to last the winter and prices start to come back to earth.”
Since my article, the BOIL ETF has lost 36%, as natural gas futures suffered a sharp decline in January due to ample supplies and mild weather.
Seasonality Nearing A Bottom
However, as we come to the end of January, I believe bearish natural gas seasonality is coming to an end. Investors should reduce their bearish bets if they have any. Over the coming months, commodity traders will start to place bets on the coming summer season demand for natural gas to power air conditioners. This causes a pronounced March to June positive seasonality in natural gas prices (Figure 1).
Figure 1 – Natural gas price seasonality (equityclock.com)
Natural Gas Back To April 2021 Prices
The recent decline in natural gas prices has been brutal, with spot gas prices falling an incredible 73% in 5 months. However, prices are now back to April 2021 levels and near a zone of support ~$2.75 (Figure 2). While further declines are possible, it is unlikely to decline at the same pace.
Figure 2 – Natural gas spot prices back to long-term support (Author created with price chart from stockcharts.com)
Freeport LNG Approved To Restart
Furthermore, in the last few days, we got news that Freeport LNG’s plant received regulatory approval for its restart. Recall, Freeport LNG represents 15% of U.S. LNG export capacity and has been out of commission since an explosion last summer.
Already, Refinitiv data shows small volumes of natural gas has started to flow through to the export terminal, meaning the ramp up process has begun. I expect the facility to gradually ramp up to its nameplate capacity in the coming weeks, which should help alleviate the glut in natural gas supplies.
Conclusion
With seasonality bottoming out, spot prices falling back to multi-year support and the upcoming restart of Freeport LNG, I believe natural gas prices may see a respite from its recent plunge.
While I think the BOIL ETF is a terrible investment in the long-term (for more details, please see my prior article), I am no longer recommending it as a short.
Aggressive traders may consider a long position in BOIL and the United States Natural Gas ETF (UNG) to play for a rebound, but please be mindful that natural gas is called a ‘widowmaker’ for a reason.
Be the first to comment