Two Products That Will Rally If Natural Gas Prices Increase

The Labor Day holiday is the official end of summer. Many grills will roll back into storage as people return to school and work and the temperatures cool. With the 2023/2024 winter season on the horizon, the energy markets will turn attention away from gasoline, which tends to see prices peak during the driving season, to heating oil and natural gas.

Natural gas futures that trade on the CME’s NYMEX division are a highly volatile commodity that has experienced explosive and implosive price moves since the exchange introduced futures on natural gas for delivery at the Henry Hub in Erath, Louisiana, in 1990.

Over the past decades, the natural gas market has matured and evolved. Initially, U.S. natural gas was a domestic market, with flows limited to the North American pipeline network. Massive discoveries in the Marcellus and Utica shale regions and technological advances in extracting natural gas via fracking increased the supply side of the fundamental equation, pushing prices lower.

Since necessity is the mother of invention, technology provided the demand side with a solution, liquefication. LNG now travels the world by ocean vessels to regions where gas prices are far higher than in the U.S. Natural gas is a seasonal commodity, with the price historically peaking as the winter approaches; in 2023/2024, geopolitics could be the most significant factor impacting the path of least resistance of U.S. prices over the coming weeks and months.

A very volatile market since 2020

• NYMEX natural gas futures reached a twenty-five-year low at $1.432 in June 2020.
• NYMEX natural gas futures rallied to a fourteen-year $10.028 per MMBtu high in August 2022.
• The price dropped below the $2 level in March and April 2023.

The U.S. and Russia are the leading producers

• The United States is the world’s leading natural gas-producing and exporting country.
• Russia is the energy commodity’s second-leading producer and exporter.
• Iran and China are third and fourth, but their total output is 66% of Russia’s and 45% of the U.S. output.

The war in Ukraine impacts worldwide natural gas flows

• Russia had been Western Europe’s leading natural gas supplier.
• Russia uses natural gas, energy, and agricultural commodities as economic weapons against countries supporting Ukraine.
• Western Europe dodged a bullet during the 2022/2023 winter as warm temperatures did not cause supply shortages and extremely high prices.
• There is no guarantee the 2023/2024 winter will be the same.

U.S. inventories remain high – U.S. and European prices are turning higher

• As of August 25, U.S. natural gas inventories across the U.S. stood at 3.115 trillion cubic feet, 18.4% above last year and 8.7% higher than the five-year average.
• As the winter approaches, U.S. natural gas prices have increased to over the $2.75 per MMBtu level on the active month October NYMEX futures contract. Prices for January 2024 delivery are above $3.80 per MMBtu.
• K. natural gas futures prices reached bottoms in May 2023 after reaching record highs in March 2022 and have been trending higher.
• Dutch natural gas futures prices reached bottoms in June 2023 after peaking at record levels in March 2022 and have been trending higher.

Risk-reward favors the upside – Two products that will rally if natural gas prices increase

• Seasonality favors the upside in natural gas as the winter approaches.
• While the forward curves for winter display higher prices, they are significantly lower than the March 2022 highs.
• UNG UNG is the ETF that tracks U.S. natural gas futures prices.
• BOIL is a leveraged ETF for natural gas, making it a short-term trading tool for bullish exposure.
• Seasonality, the ongoing war in Ukraine, and the current low prices suggest that risk-reward in natural gas favors the upside for the coming months.