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Will Natural Gas Stay Hot or Cool Off?

In more than a decade, there hasn’t been a natural gas market like the one happening right now.

On May 24, 2022, natural gas traded at $8.831 per million British thermal units (MMBtu) – its highest since September 2008.

The Russian invasion of Ukraine has caused the price of natural gas to skyrocket. From December 31, 2021, to May 5, 2022, the USD price of natural gas has risen more than 135% – outpacing all other commodity gains.

But is natural gas – a fuel source used for heating and electricity – poised for a cool-off or is it just starting to heat up?

There are several potential events on the horizon that could impact natural gas prices in the near and mid-term:

Near-month Natural Gas Futures Prices (NYMEX)
Dollars per million British Thermal Units

chart1.jpg

Source: https://www.eia.gov/naturalgas/weekly/#tabs-prices-1

RUSSIA-UKRAINE IMPACTS

While Russia’s invasion of Ukraine made natural gas exports to Europe a contentious subject and a hot trade in the first half of 2022, the second half of the year might result in less demand for the commodity.

Europe was caught off-guard by Russia’s winter invasion of Ukraine but EU nations are now responding by seeking alternatives to Russian natural gas.

In March, Europe announced plans to reduce natural gas consumption from Russia by two-thirds this year by the end of 2022.

Germany, the world’s largest buyer of natural gas, has already decreased Russia’s share of its gas imports from 55% to 40%, so far and is also preparing for an ‘abrupt end’ to Russian gas imports, if necessary. At the same time, they are investigating ways to curb demand, including insulating homes, installing heat pumps, and prioritizing renewable energy for industry.

As well, EU utilities are also turning to coal for power as an alternative. As Russia continues its invasion into Ukraine – with no signs of stopping – there will likely continue to be collective action to reduce natural gas use to pressure Russia into ending its war.

chart2.jpg

*Including wind and solar in the power sector (replacing 20bcm of gas) and solar rooftops (2.5bcm)
Source: Fitch Ratings, European Commission

SEASONAL WEAKNESS

Like many commodities, natural gas exhibits periods of seasonal strength and weakness based historically on production and consumption patterns.

Traditionally, natural gas has a period of seasonal strength from March 22nd to June 19th but falls into a period of seasonal weakness from mid-June through August. From 1995 through 2020, the return on natural gas futures from June 20th to September 1st has been -6%.

There are a number of reasons for this: natural gas reserves are typically re-established in the months following the winter. As well, during the milder weather in the spring and fall, there is typically less demand for cooling and heating from natural gas.

SUPPLY AND DEMAND CONSIDERATIONS

The current supply could impact the natural gas outlook as well. Natural gas reserves in the U.S., which have exported more natural gas to Europe in the wake of the Russian invasion of Ukraine, are 20% lower than the year-ago level, as of May 4, 2022. However, Russia is continuing to export natural gas to most European countries as Gazprom assured clients ongoing imports would not breach sanctions.

With warmer temperatures in Europe, short-term demand for natural gas is expected to drop as well. However, the EU is considering mandating gas storage for countries to be 90% full by winter.

Ultimately, warm weather and ongoing exports from Russia and the U.S. to Europe could ensure ample supply for Europe, reducing scarcity issues, but further invasion exasperations could result in throttled supply from Russia.

S&P 500 vs Natural Gas – Monthly Change

chart3.jpg

Historical data of average cumulative yearly gain from 1995 – 2020
Source: Fitch Ratings, European Commission

HOW CAN YOU TRADE THE NATURAL GAS OPPORTUNITY?

Whether you think natural gas might continue to run up or has already hit a top, high conviction short-term traders might want to consider leveraged and inverse leveraged natural gas ETFs. Leveraged and inverse leveraged natural gas ETFs offer the ability to take outsized long and short positions on natural gas futures.

In Canada, Horizons ETFs is the only provider of leveraged and inverse leveraged ETFs, which trade on the Toronto Stock Exchange (“TSX”).

For high conviction short-term traders that think natural gas has hit a top and could face a decline soon, they could consider the BetaPro Natural Gas Leveraged Daily Bear ETF (HND: TSX), which provides up to two times (200%) the inverse (opposite) of the daily performance of the Horizons Natural Gas Rolling Futures Index.

For high conviction short-term traders that think natural gas still could benefit from demand outpacing supply, they could consider the BetaPro Natural Gas Leveraged Daily Bull ETF (HNU: TSX), which provides up to two times (200%) the daily performance of the Horizons Natural Gas Rolling Futures Index.

For traders seeking simple long exposure to natural gas, they could also consider the Horizons Natural Gas ETF (HUN: TSX).

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