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BOIL: Brace For Additional Bearishness

About: ProShares Trust II - ProShares Ultra Bloomberg Natural Gas (BOIL)
by: Oleum Research

US gas stockpiles soar, beating the most recent consensus estimate and erasing part of the winter deficit.

Net speculative positioning plummet, following robust short accretions.

Spring weather conditions and strong US supply awake BOIL bears.

Investment thesis

ProShares Ultra Bloomberg Natural Gas (BOIL) shares reached fresh lows, following a strong natural gas correction, which brought the complex in oversold territory. In spite of that, fast gas inventory injections, weakening net speculative positioning and mild spring temperatures should continue to weigh on BOIL shares.

BOIL – ProShares Ultra Bloomberg Natural Gas

BOIL is a leveraged ETF that duplicates 2x the daily return of the Bloomberg Natural Gas Sub Index, which measure the price performance of natural gas futures contracts. BOIL is a tactical and geared ETF, which is not intended to be held for long-term periods, but rather to benefit from short-term natural gas futures price moves.

Since the beginning of the year, BOIL did a great job in replicating 2x natural gas price movements:

Source: Nasdaq

BOIL’s exposure is mainly concentrated on the July 2019 natural gas future contract, with an overall holding of 63.82% :

Source: Bloomberg

Besides, BOIL applies a reasonable fee compared to its main competitor UGAZ, with an expense ratio of 1.31% and a spread average on the last 60-days of just 0.16%. Nevertheless, in terms of asset base ($22.53m) and daily volume ($1.8m), BOIL is tiny compared to UGAZ, but still provides sufficient liquidity for retail investors.

Natural gas stocks

US natural gas storage advanced robustly on the April 5-12 period, up 7.97% (w/w) to 1 247 Bcf, EIA shows. With this healthy advance, American natural gas inventories wiped out most off its deficit compared to last year, establishing in a shortage of only 4% or 52 Bcf. For the time being, stockpiles remain well below the 5-year average, down 28.1% or 488.4 Bcf, following a strong natural gas winter demand and colder-than-normal temperatures. With injection season starting robustly and gas daily supply 10% higher than last’s year level, US output is likely to offset demand, providing significant tailwinds on gas futures and BOIL shares.

Source: EIA

That being said, supply-demand slightly improves (w/w), on the April 11-17 period, but remains weak for this time of the year. Indeed, while aggregate supply ramped up 0.6% (w/w) to 94.5 Bcf/d, total gas demand advanced steeper, up 2.1% (w/w) to 78.1 Bcf/d, but is still trailing supply by 17%. During the week, supply advance is mainly attributable to marketed and dry production builds, up respectively 0.5% (w/w) to 100 Bcf/d and 0.6% (w/w) to 89.4 Bcf/d. On the other side, aggregate US demand ticked up, following growing residential and industrial needs, up respectively 2.1% (w/w) to 19.9 Bcf/d and 1.5% (w/w) to 20.7 Bcf/d.

With an uptick in demand and strong US gas output, July 2019 natural gas futures, which represent 63.82% of BOIL exposure, plunged steeply during the week, overtaking the $2.61 support level and pulled BOIL shares to fresh lows.

Source: CME Group

Source: Bloomberg

Speculative positioning

Latest Commitment of Traders report (( COTR)), published by the CFTC shows a net deterioration of net speculative positioning on Nymex natural gas futures. On the April 9-16 period, speculators reduced their length by 45.74% (w/w) to a net short positioning of 53 671 contracts. Concomitantly, BOIL shares plunged 8.77% (w/w) to $19.14 per share, amid a weakening natural gas backdrop and mild weather forecasts.

Source: CFTC

This strong decline is mainly attributable to strong short accumulations, up 9.09% (w/w) to 289 828 contracts and is partly counterbalanced by moderate long accretions, up 3.19% (w/w) to 236 157 contracts. Going forward and given the lack of significant bullish catalysts on the flammable market, net spec positioning should continue to decline and pull BOIL shares with it.

Since the beginning of the year, net spec length declined six-fold, indicating a net decline in speculative interest, whereas BOIL shares lost 24.47% to $19.14 per share.

Spring weather conditions and strong US supply awake BOIL bears

Since my last article, published on February 27, when the last cold wave hit the US, BOIL dipped 19.88% to $17.93 per share, following mild spring weather, increasing gas output and rapidly shrinking natural gas storage. Going forward, mild to warm conditions develop, according to the National Weather Service on the April 28- May 4 period, across the West and Southeast, whereas Northern and Southern parts of the country are tending towards colder-than-normal temperatures.

Nevertheless, these weather conditions should only lift gas demand slightly, but national demand should remain low, near historic lows for this time of the year. In this context, adverse winds should continue to blow over BOIL shares and its underlying, natural gas futures.

Source: National Weather Service

Meanwhile, from a technical point of view, the prompt-month natural gas future contract evolves in oversold territory and this situation should continue given the lack of major fundamental catalysts. With the breakdown of the major support level of $2.55, BOIL’s bearish momentum is not expected to end anytime soon.

Given last’s week, better than expected storage injections, plummeting net speculative positioning on natural gas futures, surging US gas output and mild spring temperatures, I maintain my bearish view on the natural gas complex and BOIL shares.

I look forward to reading your comments.

Disclosure: I am/we are short 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.