Is BOIL Poised For A Bounce?

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About: ProShares Ultra Bloomberg Natural Gas ETF (BOIL)
by: Cristian Docan
Summary

American gas stockpile draws considerably amid strong demand incurred by polar vortex passage.

Net speculative positioning turns net short, whereas open interest on natural gas futures dips again.

New anticipated cold blast sustains discounted natural gas complex.

Introduction

Welcome to my ProShares Ultra Bloomberg Natural Gas ETF (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's share price.

Natural gas stocks

American natural gas withdrawal dunked considerably in the January 25-February 1 period, down 10.79% (w/w) to 1,960 Bcf, EIA shows. This has been the strongest pull registered this season and the third consecutive weekly withdrawal above 100 Bcf. With this, natural gas seasonality shortage persists, establishing 18.1%, or 431.8 Bcf, below the five-year average and 5.7%, or 118 Bcf, under 2018 levels. Despite the persisting storage shortage, which should have sustained future gas prices, market participants’ attention appears to be concentrated on record high U.S. gas output and weaker weather forecasts.

Source: EIA

Meanwhile, the supply-demand balance improved slightly. Aggregate American natural gas supply dipped 1.6% (w/w) to 92.5 Bcf/d, amid a marginal weakening of marketed and dry output, down 0.2% (w/w) to respectively 98.3 Bcf/d and 87.4 Bcf/d. Nevertheless, net imports from Canada contributed the most to this dip, posting a 21.7% (w/w) decline to 4.7 Bcf/d.

On the other side, demand plummeted vigorously following the peak reached last week. Aggregate demand plunged 14.8% (w/w) to 104 Bcf/d following plunging consumption levels registered in all segments. Overall, residential and commercial sector affected natural gas demand the most, with a 21.4% (w/w) decline to 43 Bcf/d.

With supply sliding marginally and demand weakening (w/w), March 2019 natural gas futures, which represent 47.67% of BOIL exposure, seem to have reached a bottom after bouncing on the strong support level of $2.5 per MMBtu.

Source: CME Group

Concomitantly, BOIL lost 5.32% to $20.45 per share, amid easing investor supply concerns.

Source: Bloomberg

Speculative positioning

According to the latest Commitments of Traders report (COTR) published last Friday by the CFTC and covering data from December 24-January 8 period, net speculative positioning on natural gas NYMEX contract posted a steeper decline than previous report, reversing its overall positioning to a net short length of 7,952 contracts. With that, BOIL's shares lost 28.6% to $25.34 per share and the pullback, which has developed since the beginning of the year, seems now unstoppable.

Source: CFTC

The robust decline in speculative positioning has been triggered by solid long unwinding, down 6.97% to 293,219 contracts, and was partly offset by short liquidations, down 2.18% to 301,171 contracts.

That being said, newer data provided by the CME Group depicts a moderate open interest decline in the February 1-8 period, down 4.34% (w/w) to 1,305,715 contracts. With that, short speculators' reign on the natural gas complex continues and offers negative prospects on BOIL's shares.

New anticipated cold blast sustains discounted natural gas complex

Despite the persisting natural gas storage deficit picture and recent polar vortex hitting the U.S., investors' supply fears seems to have gone extinct. With around nine weeks to go in the gas withdrawal season, and as time goes, the window of opportunity for the gas complex for a re-rating weakens and investors’ sensitivity to weather forecasts fades away. This has given sufficient catalyst to short sellers, which brought the flammable commodity near the strong support level of $2.5 per MMBtu.

Nevertheless, current prices seem way discounted given the natural gas fundamental picture and latest weather report. According to the National Weather Service, fresh cold blast is expected to cover the US in the February 18-24 period. This will likely deliver a robust demand surge, fueling a healthy price advance, given present discount of natural gas futures.

Source: Natural Weather Service

Going forward, the natural gas futures are poised for a bounce, given recent market beating which is lagging on the fundamental picture.

I look forward to reading your comments.

Disclosure: I am/we are long BOIL. 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.