Natural Gas Set to Soar on Rising Global Temps

Temperatures have hit unprecedented and dangerous levels in China, North Africa, and the Middle East in recent months, and even from Texas to Florida, the heat index rose to 110 degrees in late June and early July.  

In Las Vegas, my home city, temperatures increased to over 110 during the July 4 weekend. It is certainly hot out there—and everywhere—this summer.  

El Nino is considered the culprit. The weather phenomenon is a warming of the ocean surface in the central and eastern tropical Pacific Ocean, and together with climate change, has created the warmest global temperatures in history. 

The unbearable heat causes the demand for air-conditioning to soar, and according to the U.S. Energy Information Administration, 39.8% of U.S. utility-scale electricity generation comes from natural gas. Our air-conditioners work overtime as we escape from the heat indoors, increasing natural gas demand.  

The ProShares Ultra Bloomberg Natural Gas ETF (BOIL) provides leveraged exposure to rising natural gas prices. 

Natural Gas ETFs 

Natural gas peaked in August 2022 at the highest price since 2008. The price took off on the upside after a bearish trend of lower highs and lower lows from 2005 through 2020, taking nearby U.S. natural gas futures from over $15 per metric million British thermal unit to $1.43. 

The chart shows the rally from $1.43 in June 2020 to $10.028 per MMBtu in August 2022 and the subsequent correction that took natural gas to a $1.946 low in April 2023.  

Weather Extremes Support Natural Gas  

Natural gas is a seasonal commodity that rallies when temperatures reach extremes and falls when heating or cooling requirements tail off. Therefore, the winter and summer tend to experience the most price variance. 

Over the past years, natural gas has replaced coal in U.S. power generation, causing summer to become as volatile as winter in the natural gas arena. The recent temperature spike only increases the demand for cooling and the power generated by natural gas.  

Supporting Natural Gas Futures in July  

The three factors that could send natural gas futures higher over the coming weeks are: 

• While natural gas has rallied from below $2 per MMBtu, the price at the $2.65 level remains over 73% below the August 2022 $10.028 per MMBtu high.  
• Open interest in the NYMEX natural gas futures market at over 1.2 million contracts has increased from below one-million contracts in late 2022. The rise in open interest could signify many short positions or short hedges that could fuel another significant rally.  
• According to Statista, the two leading natural gas-producing countries are the United States and Russia. Europe depends on Russian natural gas supplies, and the war in Ukraine, sanctions on Russia, and Russian retaliation have caused supply problems for the European NATO countries. U.S. natural gas can now travel the world in liquid form by ocean vessels. The ongoing war pressures the U.S. to supply LNG to countries suffering from Russian retaliation.  

At the $2.60 per MMBtu level on July 7, the downside for U.S. natural gas futures could be limited, and the upside explosive.  

BOIL Leverages Short-Term Natural Gas Futures 

The ProShares Ultra Bloomberg Natural Gas ETF is a highly liquid, leveraged, and volatile product for market participants seeking bullish U.S. natural gas exposure without venturing into the futures arena.  

At $58.95 per share, BOIL had $1.03 billion in assets under management. BOIL trades an average of over 3.1 million shares daily and charges a 1.33% management fee. The most recent rally in NYMEX August natural gas futures took the price 31% higher from $2.244 on June 1 to $2.936 on June 26.  

Source: etf.com 

The chart highlights BOIL’s rally from $45.60 to $76.75 per share over the period, a 68% rise, as BOIL delivered over twice the percentage gain in the August NYMEX natural gas futures.  

Leverage comes at a price, time decay. If natural gas futures move lower or remain stable, BOIL loses value. Moreover, BOIL’s decay makes it susceptible to reverse splits. BOIL’s most recent one-for-twenty share reverse split occurred on June 23, 2023.  

Fund Flows: Signs of a Shift 

The significant open interest in the natural gas futures market could ignite a rally as market participants holding short positions and short hedges scramble for an exit when the price rallies. The etf.com Fund Flows Tool reflects the increase in flows over the past six months, which indicates a growing bullish sentiment.  

As the Fund Flows Tool shows, BOIL has seen $1.648 billion in inflows since the end of 2022. The low price has attracted investors’ and traders’ attention. 

BOIL could be the perfect approach for profits as the U.S. temperatures are causing boiling hot conditions that increase natural gas demand.