Trading natural gas futures can be like riding a psychotic horse through a burning barn. The implosive price action in 2020 came during the global pandemic that pushed most commodity prices to multi-year lows. While U.S. natural gas futures fell to $1.44 per MMBtu, the lowest price since 1995, nearby NYMEX crude oil futures traded under zero for the first time since trading began in the 1980s.
The war in Ukraine erased the bearish sentiment in oil and natural gas futures markets, causing oil to rise to over $130 per barrel and natural gas to eclipse $10 per MMBtu, with the energy commodities reaching levels not seen since 2008. While the war continues, traditional energy prices have declined, with oil at the $70 per barrel level and natural gas threatening to move below $2 per MMBtu in June 2023.
In a May 10 Barchart article, I cautioned, “A long position is tempting at the $2 level, but as crude oil taught us in April 2020, a fall below zero on the nearby futures contract is not impossible. Natural gas is more volatile than crude oil, so anything is possible.” July natural gas futures were at the $2.34 per MMBtu level on May 10 and moved to below $2.20 on June 2. BOIL and KOLD are highly liquid leveraged ETF products that track U.S. natural gas prices higher and lower. With the third anniversary of the quarter-of-a-century low this month, natural gas could challenge that bottom as the trend remains bearish.
A bearish trend since August 2022
U.S. natural gas futures prices plunged after probing over $10 per MMBtu in August 2022.
The chart shows the decline that took the energy commodity to a $1.946 per MMBtu low in April 2023, an 80.6% decline from the August 2022 high. While the trend remains bearish, nearby natural gas futures have found some support around the $2 per MMBtu level and was below $2.20 on Friday, June 2.
European prices are trending lower
The explosive move in European natural gas prices in 2022 was a leading reason for the U.S. natural gas rally. Russia’s invasion of Ukraine, sanctions on Russia, and Russian retaliation caused significant supply concerns, listing European natural gas prices. Europe depends on Russian supplies that move from the energy producer to European consumers via pipelines. U.K. and Dutch natural gas futures rose to record peaks in 2022 but have turned lower over the past months.
The chart shows the explosive rally in 2022 and the return to pre-invasion prices in June 2023. U.K. natural gas prices have declined over 93% since March 2022.
Dutch natural gas prices also fell more than 93% from the March 2022 high, returning to the pre-invasion levels in June 2023. Since U.S. natural gas travels the world by ocean vessel as LNG, the decline in European prices has weighed on U.S. prices.
Inventories remain high
Meanwhile, high U.S. inventory levels have also pushed natural gas prices lower.
Source: EIA
The chart highlights that at 2.446 trillion cubic feet, natural gas in storage across the United States was 29.5% above the level in late May 2022 and 16.6% over the five-year average as of May 26, 2023. Inventories do not support higher natural gas prices as they threaten to challenge the June 2020 low.
The long-term U.S. natural gas futures chart dating back to when NYMEX introduced the contracts in 1990 shows the June 2020 bottom was the lowest price since 1995. The potential for a challenge of that price on the third anniversary of the low is high. However, natural gas is a wild and volatile market that always has the potential for surprises.
BOIL is the bullish ETF
If natural gas has found a bottom at just below the $2 level, and the current consolidation at over $2 is a launchpad for another rally, the Ultra Bloomberg 2X Natural Gas ETF product (BOIL) could turbocharge returns if the timing for a rally is just right. The leverage involves time decay, making timing the most significant factor for BOIL and other leveraged products that enhance price performance.
At $2.37 per share on June 2, BOIL had over $770.76 million in assets under management. BOIL trades an average of over 59 million shares daily and charges a 0.95% management fee.
The last rally in July NYMEX natural gas futures took the price from $2.233 on May 5 to $2.816 per MMBtu on May 19, a 26.1% gain.
Over the same period, the BOIL ETF rose from $2.65 to $3.99 per share or 50.6%.
At below $2.40 per share, the odds favor a ten-for-one reverse split in the BOIL product.
KOLD is the bearish ETF
If natural gas is going to challenge the $1.44 2020 low, and the current consolidation at over $2 is a temporary period before a continuation of the selling that has gripped the market since August 2022, the Ultrashort Bloomberg 2X Natural Gas ETF product (KOLD) could turbocharge returns if the timing for a decline to lower lows is on the horizon. As with BOIL, the leverage involves time decay, making timing the most significant factor for KOLD and other leveraged products that enhance price performance.
At $88.90 per share on June 2, KOLD had over $151.7 million in assets under management. BOIL trades an average of over two million shares daily and charges a 0.95% management fee.
The last decline in July NYMEX natural gas futures took the price from $2.816 on May 19 to $2.136 per MMBtu on June 1, a 24.1% loss.
Over the same period, the KOLD ETF rose from $54.84 to $92.35 per share or 68.4%.
BOIL and KOLD are valuable trading tools with two significant risks. First, they only trade when the U.S. stock market operates. Since natural gas futures trade around the clock, price moves resulting in highs or lows when the stock market is closed are not reflected in the leveraged ETFs. Second, since leverage involves time decay when the price does not move in the anticipated direction or remains stable, the leveraged ETFs lose value.
In June 2023, natural gas looks much like it did three years ago, but time will tell if another multi-decade low is on the horizon or if the current consolidation near the recent low is a launchpad for higher prices.
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.
