BOIL Lift Is Not Finished
Summary
- Natural gas stockpile further dips, following increasing demand and steady supply.
- Net speculative length dip decelerates due to robust long accumulation.
- With cooling demand turning far above average and the storage natural gas picture tightening, BOIL uptick will triumph.
Introduction
Welcome to my ProShares Ultra Bloomberg Natural Gas (NYSEARCA:BOIL) report. As you may know, BOIL is a U.S incorporated ETF that replicates 2x the daily return of an index that measures the price performance of natural gas futures. This ETF is not recommended for long-term holding, since its rollover costs and expense ratio of 1.31% slowly erodes its value.
In this report, I wish to discuss (based on the Energy Information Administration (EIA) estimate), recent changes in natural gas inventories and speculative positioning (released by the Commodity Futures Trading Commission (CFTC)) to assess the impacts on natural gas futures and BOIL. Then, based on the recent macro developments, I highlight the triggers, which will likely impact BOIL share price.
Natural gas stocks
According to the latest EIA report, U.S. natural gas stockpile climb further slowed on the July 13 – 20 period, up only 1.07% or 24 Bcf to 2 273 Bcf. With this mediocre injection rate, natural gas stockpile is now close to reaching 2014 inventory level, when one of the biggest snowstorm in recent U.S history occurred. Current natural gas stocks are 16.3% or 441 Bcf below the 5-year level and 23.7% or 707 Bcf below last year’s stockpile, bringing strong tailwinds to natural gas futures and BOIL price.
Source : EIA
During the July 19–25 period, total U.S natural gas daily supply increased marginally, up 0.3% (w/w) to 86.9 Bcf/d, following improving U.S output. Indeed, marketed and dry production (w/w) rose by respectively 0.8% to 91.9 Bcf/d and 0.7% to 81 Bcf/d, whereas net imports from Canada slightly offset the production boost, down 4.9% to 5.8 Bcf.
In the meantime, U.S natural gas demand dipped, down 1.5% (w/w) to 78.8 Bcf/d, following declining power generation demand, down 5.9% to 36.7 Bcf/d, which was partly offset by surging residential and commercial demand, up respectively 13.4% to 7.6 Bcf/d.
With supply improving slightly and a dipping demand, September 2018 natural gas futures, which represent 198.52% of BOIL exposure, continued its strong rebound and has now slightly overtook the $2.8 resistance level.
Source: CME Group
Meanwhile, BOIL advanced 4.28% to $27.46, following increasing undersupply risks, surging demand and improving weather forecasts.
Source: Bloomberg
Speculative positioning
According to the latest Commitment of Traders report (COTR) provided by the CFTC on July 17 - 24 period, net speculative positioning on natural gas NYMEX contract continued to dip, down 10.84% (w/w) to 129,652 net short contracts, whereas BOIL gained 1.26% to $25.74 per share.
Source: CFTC
This decline in net speculative positioning is due to robust short accumulation, up 4.95% (w/w) to 449 532 contracts but is slightly offset by acceleration in long length, up 2.74% (w/w) to 319,880 contracts.
Since the beginning of 2018, net speculative length build further decelerates, establishing up just 7.72% or 10,849 contracts, whereas BOIL (y/y) decline eases slightly, down 23.85% to $25.74 per share.
Cooling demand turns far above average and storage picture tightening will help lift BOIL
Natural gas bullishness should prevail in the coming days, amid above-average cooling demand and storage picture tightness.
Weather guidance remains supportive of natural gas futures, given recent uptick in heat for most of August. Power burns will continue to be strong for the coming days as the latest 8 to 14-day National Weather Service outlook calls for warmer than normal temperatures in West and Northeast regions, which might provide a robust demand boost. With winter season approaching and storage deficit more than 20% below the 5-year average, market concerns regarding subdued injections level should soon materialize, providing a strong support for BOIL price share.
Source: Natural Weather Service
Going forward, the market will likely be more sensitive to hotter weather trends, following two straight misses from the EIA weekly storage report and even if U.S natural gas production rebounded over the past weeks, strong power burns driven by cooling demand days should cancel out production growth.
Given the above, natural gas futures bullishness is not over and should drag with it BOIL's share price.
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This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BOIL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (2)
I use 3X UGAZ/DGAZ for nat gas trading ... much better liquidity to compared to BOIL: over 20 times more daily volume