BOIL: Weak Gas Injections And Hot Weather Provide A Strong Upside For The Commodity

About: ProShares Ultra Bloomberg Natural Gas ETF (BOIL)
by: Oleum Research

U.S. natural gas injections into storage decelerated (w/w), amid a tightening consumption picture, triggered by healthy power needs.

Net spec positioning on Nymex natural gas future contracts lift moderately, in spite of declining interest for the gas complex.

While the technical gas pricing continues to point to oversold momentum, the heat wave expected to develop over the U.S. will provide healthy tailwinds to the flammable complex and BOIL shares.

Investment thesis

A pullback is slowly building on the ProShares Ultra Bloomberg Natural Gas (BOIL), given weakening gas storage injections, reversing speculative sentiment and vigorous heat expected to hit the country.

Source: TradingView

About BOIL – ProShares Ultra Bloomberg Natural Gas

BOIL seeks to replicate 2x the daily return of the Bloomberg Natural Gas Sub Index, gauging the price performance of natural gas futures contracts. BOIL is a tactical and geared ETF and is not intended to be held on long-term periods. While the instrument enables investors to benefit from short-term natural gas futures moves, long-term performance is slightly eroded by beta-slippage and higher-than-average incurred costs.

Since the beginning of the year, BOIL’s movements replicated accurately 2x the performance of natural gas futures:

Source: Nasdaq

Furthermore, while BOIL usually rolls its exposure on front-month natural gas futures, the Fund increased its exposure on September 2019 futures:

Source: Bloomberg

Besides, BOIL applies a reasonable fee compared to its main competitor UGAZ, with an expense ratio of 1.31% and an average spread on the last 60-days of just 0.15%. Nevertheless, in terms of asset base ($31.74m) and daily volume ($2.2m), BOIL does not compare to UGAZ, but still provides sufficient liquidity for retail investors.

Natural gas stocks

According to the latest EIA report covering the June 21-28 period, gas storage lift decelerated (w/w), up 3.87% to 2 390 Bcf, corresponding to a moderate storage build of only 89 Bcf. With that, the flammable seasonality enhancement persists and the yearly inventory surplus establishing now at 11.1% or 238 Bcf, whilst the 5-year average deficit declines to 5.7% or 145.4 Bcf. These developments continue to pressure negatively the natural gas complex and BOIL shares, but the strong pullback witnessed last Friday shows that bulls are slowly taking over the depressed natural gas markets.

Source: EIA

Besides, U.S natural gas supply and demand tightened during the week ending June 26, the EIA shows.

Source: EIA

While aggregate gas supply lifted marginally, up 0.4% (w/w) to 94.2 Bcf/d, aggregate gas demand increased steeper, up 2.7% (w/w) to 84.1 Bcf/d, establishing now only 10.7% below total U.S. gas supply.

U.S. supply of gas has not fundamentally changed over the period. Indeed marketed and production advanced marginally, respectively 0.6% (w/w) to 100.4 Bcf/d and 0.7% (w/w) to 89.6 Bcf/d, whereas net imports from Canada continue to decelerate, down 2.1% (w/w) to 4.6 Bcf/d.

Concomitantly, aggregate American demand for the flammable commodity continues to enhance, as higher than normal power burns continue to sustain American gas consumption, up 7.3% (w/w) to 36.6 Bcf/d.

Speculative positioning

Source: CFTC

During the week ending July 2, net speculative bets on Nymex natural gas futures lifted moderately, up 3.96% (w/w) to 159,145 net short contracts, the CFTC shows.

This climb comes after five consecutive strong plunges, indicating that the sentiment in natural gas markets is reversing. While longs liquidated their positions moderately, down 4.27% (w/w) to 218,156 contracts, short unwinding totally offset it, down 4.14% (w/w) to 377,301 contracts. Nevertheless and in spite of the net spec enhancement, the interest for the flammable commodity seems to remain low, given that speculators reduced their respective length by 26,031 contracts. In the meantime, BOIL posted an adverse performance, declining 2.25% (w/w) to $13.05 per share.

Since the beginning of the year, net spec positioning decline accelerated, dipping 20 times, or by a staggering 151,193 contracts, whereas BOIL YTD performance reduced its (w/w) decline, down 40.84% to $14.99 per share.

Fundamental changes

Since our last article released on June 13, the fundamental picture of natural gas has improved significantly, following a confluence of factors.

U.S. weather forecast indicates that an intense heat wave is forming in key demand areas, in the July 15-21 period. Indeed, warmer than normal temperature are expected to hit the entire country, according to the National Weather Service. The East Coast will be particularly exposed, given that weather guidance points toward 80%+ probabilities of a heat wave emerging in the Midwest, Northeast and Southeast. That will significantly sustain the power sector and lift residential/commercial cooling demand, thus providing vigorous tailwinds to natural gas futures and BOIL shares in the short term.

Source: National Weather Service

Furthermore, with imports from Canada weakening and U.S. output reaching fresh highs, the upside move should remain limited in the medium to long term. In addition and despite the new LNG export terminal expected to come online by the end of 2019, overseas gas markets are also suffering from oversupply and low prices in both East Asia and Europe.

Nevertheless, given that natural gas prices are technically in an oversold territory, evolving below the $2.3 MMBtu threshold, prices are especially sensitive to any bullish news at this time and any appreciation of the weather outlook or weaker injections into storage will contribute to generate additional bullish momentum.

This was actually the case last Friday, when better than expected June non-farm payrolls of 224k versus a consensus of 160k new created jobs triggered increased volatility on risk assets and commodity futures. This powerful sign, indicating that the U.S. economy is still on a robust growth path, tempered federal fund interest rate hike expectations, reconfirming the strength of U.S. natural gas demand.

Given this context, characterized by weaker than expected natural gas injections, a moderate net spec lift, a strong expected heat wave expected ahead of us and an improving economic U.S backdrop, we revert our recommendation, anticipating renewed upside on the natural gas futures and BOIL shares.

We look forward to reading your comments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.