UNG - BOIL: Not A Buying Opportunity

2024-02-11 21:59:35 ET

Summary

• ProShares Ultra Bloomberg Natural Gas is an ETF that tracks twice the daily performance of the Bloomberg Natural Gas Subindex.
• The outlook for natural gas prices is weak due to excess supply and weak demand, especially as we approach the end of the heating season.
• BOIL is not a suitable investment for those looking to profit from a potential intermediate-term recovery in gas prices, as it is subject to compounding and roll risks.
• Historically, when gas prices are weak through early February, prices continue to decline into early June.

The ProShares Ultra Bloomberg Natural Gas ( BOIL ) is an exchange-traded fund (ETF) that's designed to produce twice the daily performance of the Bloomberg Natural Gas Subindex. In turn, the Bloomberg Natural Gas Subindex tracks the price of natural gas futures traded on the New York Mercantile Exchange (NYMEX).

I covered BOIL on Seeking Alpha back on July 28, 2023," rating the ETF a "Strong Sell."

Last summer, I wrote that while I'm bullish on natural gas over the long haul, the outlook for the commodity appeared mixed at best over the short-to-intermediate term. Investors tend to overestimate the bullish demand pull from hot summer weather and associated cooling demand; winter heating demand is a far more important driver for natural gas.

I also explained why I believe BOIL is a flawed ETF for anyone looking to speculate on trends in natural gas prices over holding periods of more than 5 months.

That's primarily due to two issues - the cost of rolling futures contract exposure over time and compounding risk resulting from BOIL's target of tracking twice the daily change in the Bloomberg Natural Gas Subindex rather than returns over longer holding periods.

Here's a look at returns from BOIL since July 28, 2023:

As you can see, BOIL initially rallied to an August 9th closing peak of $77.23; however, it's now down over 71% from the close on July 28th, the day the article was published.

After a plunge of that magnitude, it's only natural to wonder if gas is close to a bottom, or if BOIL might be worth buying at current depressed levels ahead of a potential recovery in gas prices into the coming summer cooling season....

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