COM - BOIL: Bearish Near-Term Natural Gas Risks But Spotting A Bullish Play Into 2024

2023-12-13 13:58:41 ET

Summary

• Energy traders have been disappointed by warm winter forecasts and a very mild start to the US heating season.
• The ProShares Ultra Bloomberg Natural Gas ETF has suffered in the last several months, but I outline a long idea should NG near key support.
• Trading with caution with a 2x long leveraged product like BOIL is imperative, so I focus on key risk/reward factors as the winter rolls on.

Old man winter is nowhere to be found. Energy traders, at least the bulls, continue to be disappointed by forecast maps, one after another, showing fire-truck red (indicating warmer temperatures) across many of the key demand centers across the continental US. As it stands, NOAA’s 8-14 day outlook , as of December 12, 2023, shows above-average temperature risks during the days leading up to and through Christmas. Will the trend reverse when the calendar flips? Hard to say, but let’s take a look at a handful of critical maps and charts related to natural gas, and what traders of the popular ProShares Ultra Bloomberg Natural Gas ETF (BOIL) should weigh over the coming weeks.

I currently have a hold rating on the ETF. I see many bearish risks priced in, considering that the January contract of nat gas – typically the most expensive of any month – has the hallmarks of the bulls throwing in the towel. I would still like to see improved momentum features before calling NG a buy.

Blood-Red Temperature Probability Map Through Dec 26

For background, BOIL seeks daily investment results, before fees and expenses, that correspond to two times (2x) the daily performance of the Bloomberg Natural Gas Subindex. Unlike equities, which entitle the holder to a continuing stake in a corporation, commodity futures contracts specify a delivery date for an underlying physical commodity. The index measures the performance of commodity futures contracts, and, as the date for a futures contract comes due, the index replaces such contracts with similar contracts with later expirations. The index thus is a "rolling" index, according to ProShares . Moreover, when the natural gas forward curve is in contango - when near-dated contracts are cheaper than contracts further out - then BOIL has the added risk of being forced to buy expensive contracts and selling at cheaper levels later in the fund's life.

BOIL: Exposure to January-March 2024 Contracts, Roll Risk During Contango

Natural Gas Futures Foward Curve: Bearish Contango

Bearish Storage Trends After Approaching the 5-Year Average Mark in September

My usual leverage ETF disclaimer: As always, it is imperative to recognize the risks associated with owning a leveraged ETF like BOIL. Long-term gains can be massive if a protracted bullish natural gas trend takes place, but volatility and whippy price action generally hurt such ETPs. Thus, a fund like BOIL should only be used as a short-term trading vehicle, not as a long-term investment, and hence, this article is a near-term tactical outlook on BOIL. As I always caution, for a deeper understanding of the risks tied to leveraged ETFs, you can refer to authoritative bodies such as the SEC (links at the end of this article). More information can be found in the updated Investor Bulletin titled: Updated Investor Bulletin: Leveraged and Inverse ETFs .

Here is an illustration of how negative compounding returns occur in a leveraged ETF: Suppose an index starts at $100, and the leveraged product also begins at $100. If the index falls by 10% to $90, the 2x bull product declines to $80. However, if a subsequent 10% rise happens, the index climbs to $99 (a 1% loss from the initial value). In contrast, the 2x bull fund only jumps to $96 (0.8*120), reflecting a 4% decrease.

BOIL is a moderate-sized ETF. More of a trading vehicle given its leverage nature, the fund has $715 million in assets under management and does not pay a dividend yield , as of December 12, 2023. Share-price momentum has been dreadful over the last year-plus, with particular downside seen since early November when it became apparent that the first half of the heating season would feature weak demand in the US.

The fund has a high 1.24% annual expense ratio (0.95% net), but I caution investors not to hold the fund beyond a handful of trading days given the risks of negative compounding returns. Not surprisingly, BOIL has an extremely poor F Risk ETF Grade, though liquidity is decent with the fund – average daily trading volume is more than five million shares while its 30-day median bid/ask spread averages seven basis points, according to ProShares.

Taking a step back, Commodity Weather Group now expects that December 2023 will go down as the third-warmest December since 1950. As a result, the prompt month of natural gas has cratered by about 35% since the start of November.

A December to Forget for the NG Bulls: Very Low GWHDDs

Offering some solace to those currently long NG, late November through year-end tends to be the worst period of the year for the key domestic energy commodity. Contrary to intuition, as conditions turn colder across the US, natural gas futures tend to sell off, according to data from Equity Clock .

Bearish Seasonal Trends in NG Through Year-End

Fundamentally, natural gas demand has been soft lately, as noted above with the very mild temperatures that are ongoing. The supply side is not bullish, either. Another one of my go-to NG charts comes from Bluegold Trader . The service notes that we are at a record-high domestic dry gas production level for this time of year, having notched an all-time high for any point in history just a few weeks ago. This has led to a loose supply/demand balance, and that has been borne out in NG futures' price action.

Near-Record-High CONUS Dry Gas Production

Celsius Energy notes that the next 14 days appear bleak to tighten up that balance, too.

Bearish Near-Term Weather Guidance, Low GWHDDs Through Dec. 26

The Technical Take

Where might we find support on the chart of nat gas? Take a look at the graph below – the multi-year low on the continuous prompt-month is just under the psychologically important $2 mark. Getting long BOIL with a stop under what equates to $1.80 on prompt-month NG looks like a favorable risk/reward play in my eye. I see resistance close to $2.90 - the lows from October and November before the major plunge in late November and through the better part of this month.

Natural Gas Prompt Month: $2 Support, $2.90 Resistance

For BOIL, there is an extreme amount of bearish overhead supply starting at the $50 mark, so if the ETF recovers to that level, selling and staying on the sidelines might be a wise move.

BOIL: Resistance Near $50, Deeply Oversold

As many energy traders know, the winter can be a volatile and perilous time for investing in natural gas, so this is a particularly important period to trade a leveraged product like BOIL with prudence.

The Bottom Line

I see BOIL drifting lower from here but buying as natural gas approaches $2 looks like a strong risk/reward play in my view. Taking profits on NG’s climb toward $2.90 is a possible exit strategy.

1) The Lowdown on Leveraged and Inverse Exchange-Traded Products (FINRA)

2) Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors (SEC)

3) FINRA's Reminder on sales practices for Leveraged and Inverse ETFs (FINRA)

For further details see: