In an August 5, 2023, Barchart article, I asked if it was “The time to buy natural gas?” September NYMEX natural gas futures were at the $2.577 per MMBtu level that day. On August 25, the price had not moved much and October futures were near the $2.65 level. Meanwhile, European gas prices have moved significantly higher over the past weeks, which could be a bullish sign for U.S. prices as the energy commodity heads toward the peak demand season during winter.
Natural gas prices are highly sensitive to European prices because of the war and LNG
When the natural gas industry embraced technology to process gas into liquid, it changed the market’s fundamentals. The CME’s NYMEX division began trading natural gas futures and futures options in 1990, when the energy commodity was domestic, limited to the North American pipeline network. Liquefication changed the market as natural gas, or LNG, now travels the world on ocean vessels.
Source: enerdata.net
The chart highlights the United States and Russia dominated worldwide natural gas production in 2022. Over the past years, the U.S. has increased LNG shipments to countries with significantly higher prices. The war in Ukraine, sanctions on Russia, and Russian retaliation against countries supporting Ukraine have only increased the demand for U.S. LNG exports. Western Europe is historically dependent on Russian natural gas exports through pipelines. However, the war changed the supply dynamics, causing European prices to soar to record peaks in 2022.
U.K. and Dutch natural gas futures have rallied since early August
After rising to all-time highs in 2022, U.K. and Dutch natural gas futures prices plunged as the 2022/2023 winter was warmer than in the past years, causing heating and natural gas demand to decline.
The chart highlights the explosive rally that took U.K. natural gas futures prices to GBP 800 per 1,000 therms in March 2022 when Russia invaded Ukraine. The 2022/2023 warm winter caused the implosion to a GBP 52.64 low in May 2023. At GBP 87.73 per 1,000 therms on August 25, U.K. natural gas prices have been rallying, making higher lows and higher highs since May. As the war continues, the uncertainty of supplies during the upcoming 2023/2024 winter has supported gains in the U.K. natural gas futures market.
Meanwhile, Dutch natural gas futures prices rose to a record high in March 2022, reaching 345 euros per MW before plunging to a 22.855 euro low in June 2023. At 35.205 euros on August 25, the price has been increasing in preparation for the upcoming winter.
U.K. and Dutch natural gas futures forecast no end in sight for the war in Ukraine and problems with Russian supplies.
The U.K. forward curve highlights progressively higher prices through January 2025.
The Dutch natural gas forward curve reflects a similar bullish forecast for the coming months and years.
A cold European winter could be explosive for natural gas
A cold winter could cause supply shortages, pushing prices significantly higher than the current levels. Meanwhile, while Europe is most susceptible to rising natural gas prices and shortages created by Russian retaliation to sanctions, rising prices on the other side of the Atlantic Ocean will likely support higher U.S. natural gas prices as the demand for LNG exports increases.
U.S. natural gas rose to over $10 per MMBtu in August 2022 when European prices soared. A warm winter caused prices to come back down to earth. Meanwhile, as the war in Ukraine continues, the potential for another price spike is a clear and present danger for natural gas and other energy commodities.
The forward curve projects far higher U.S. prices in the coming months
The U.S. natural gas futures market’s forward curve reflects seasonality and the potential for increasing worldwide demand.
The U.S. natural gas futures forward curve shows while nearby prices are at the $2.519 level on August 25, prices for delivery in January 2024 are 53.6% higher at $3868 per MMBtu. January 2025, natural gas at $4.544 per MMBtu is over 80% higher than the nearby price. The forward curve typically shows a premium for winter delivery, but the current price structure reflects geopolitical risks alongside seasonality.
As of the week ending on August 18, plenty of natural gas was sitting in storage across the United States.
Source: EIA
The chart shows at 3.083 trillion cubic feet, natural gas in storage was 20% above the previous year and 9.5% higher than the five-year average. Inventories have kept a lid on natural gas prices. Still, a cold European winter and the potential for Russian supply issues, as Moscow uses natural gas as an economic weapon, remain high.
BOIL is a short-term leveraged product that requires time and price stops
At under $2.70 per MMBtu in late August 2023, natural gas for October delivery was over 70% below the August 2022 $10.028 per MMBtu high. At $3.79 for January 2024 delivery, the futures were more than 60% under the 2022 high. The ongoing war and Russia’s position as the world’s second-leading natural gas producer could strain U.S. supplies during a colder-than-average 2023/2024 winter season. Natural gas futures typically rally as the winter approaches, which makes late August or early September an excellent time to put the energy commodity on your trading radar.
The most direct route for a risk position in the U.S. natural gas market is the highly volatile, leveraged, and margined futures and futures options arena. The U.S. Natural Gas ETF Fund (UNG) is an unleveraged ETF that moves higher and lower with U.S. natural gas futures prices.
Meanwhile, the Bloomberg Ultra Natural Gas 2X ETF (BOIL) is a short-term trading product that magnifies bullish price moves in the natural gas futures arena. At $61.59 per share on August 25, BOIL had over $1.056 billion in assets under management. BOIL trades an average of nearly 3.75 million shares daily and charges a 0.95% management fee. BOIL is not an investment asset but a trading vehicle. BOIL’s leverage makes the ETF’s price decline when natural gas falls or remains static. BOIL tends to deliver a higher percentage gain when the energy commodity rallies. However, the leverage comes at a price, which is time decay.
Late August 2023 is the perfect time to monitor BOIL and other natural gas-related assets. After the price implosion took the energy commodity from over $10, the highest price in fourteen years, to under $2, natural gas remains below $3 for the nearby contract and under $4 per MMBtu for the January 2024 contract. The uncertainty of the upcoming winter could make the current prices look like bargains before the end of 2023.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
