BOIL: Natural Gas Is Poised To Light Up (Strong Buy)

Summary

• Ngas prices are driven by Russia sanctions, US export capacity, and war.
• We like the BOIL ETF as a leveraged bull play on Ngas.
• Prices have fallen on supply chain migration away from Russia.
• A renewed Russian offensive is likely to start before NATO heavy armor arrives, threatening essential supplies into Spring.

CHUNYIP WONG

Natural Gas Price Chart (tradingview.com)

Macro Issues Cloud The Outlook

Natural Gas (Ngas Strong Buy - NYSEARCA:BOIL ETF Strong Buy) has had an epic run from Covid lows. From its $1.46 mcf bottom in June of 2020, Ngas has rallied 687% to its high in late August of last year. That is the biggest bull run in decades. The upleg from December 2021 lows of $3.54 per mcf was likely driven by growing concerns that Russia would attack Ukraine, disrupting the flow of energy to Europe (Ukraine). Germany bought about 40% of its energy needs from Russia before the war. The Bundesnetzagentur reported that Russian imports were 52% in 2021, dropping to 22% last year as the supply chain migrated away from Nord Stream 1 & 2 (OilPrice.com). Norway stepped in to provide 33% of imports last year, according to the report. Industrial consumption fell by 23% y/y in 4Q22, while domestic consumption fell 21% as conservation efforts took hold.

Shifting Supply Chains Prove To Be Adaptable

Supplies of Ngas to Germany, the largest consumer in the EC, represent 25% of total energy and 97% of it comes from imports (EIA). Prior to last year, it had no LNG terminals to import via shipping. With a massive effort to build necessary infrastructure, German Ngas supplies are now 89% full, with capacity to match demand through March, though the weather could alter the math significantly (German gas supply). Germany depletes its supplies by about 1% per day if temperatures drop below zero degrees C. Exports of LNG to Europe now represent 60% of total shipments from the US versus 19% y/y (Energy traders). Europe, through remarkable coordinated efforts, has managed to mitigate what could have easily been an energy crisis of similar magnitude to the US' experience in 1973-74 when OPEC abruptly tripled the price of oil.

Why Are We Bullish On Ngas

Firstly, we believe that seasonal factors such as winter storms could bullishly impact the price of Ngas over the next 3-6 months. A cold snap could quickly alter the sanguine view of supply stability on the Continent, driving prices higher. Demand has been significantly constrained, helped out by mild weather so far, but as the Ground Hog likes to say: winter ain't over just yet! Domestic consumption will rapidly expand as far as it can without widespread pressure to conserve despite impressive short-term results by consumers.

Secondly, Russia appears to be advancing its forces for a potentially powerful advance on existing battle lines. In my opinion, Putin has proven over the years to be a master strategist. That suggests to us that he will use the balance of cold weather when heavy armor can move relatively freely across the landscape to attack key strategic objectives before NATO tanks can be delivered. Spring brings the inevitable quagmire of mud that so effectively pinned down last year's incursion, helping Javelin attacks that destroyed hundreds of Russian tanks and armored vehicles (New Offensives).

Thirdly, drilling for new Ngas sources has been constrained over the last 2 years as the Biden administration exercised its strategy of denying drilling projects and pushing ESG initiatives that favored renewable energy and electric vehicles over fossil fuel and internal combustion engines (ICE). Rig counts have increased recently as fracking returns to the market after a difficult 4 year period where new projects were sharply lower than in prior years (US Rig Count).

Finally, the charts indicate a completed 5-wave rally from Covid lows, where wave-3 up equals wave-5 up. The decline from August highs should be a 3-wave, ABC corrective decline. Our alternate count suggests that a larger bear market could still be operative, but that after such a sharp bear leg lower, at least a corrective rebound is likely and could be substantial. In short, the charts look good for Ngas.

Trend History of Ngas Trading

Commodities like natural gas are well suited to technical analysis, in part because fundamental information is difficult if not impossible to gather. As a result, we spend time evaluating the charts to provide useful insights for potential investors.

Ngas' charts indicate a completed 5-wave rally from Covid lows, where wave-3 up equals wave-5 up. The decline from August highs should be a 3-wave, ABC corrective decline. The A-down of the correction since August highs, counts as a 3-wave as expected following Elliot Wave Theory (EWT). The B-up is also a 3-wave count. The C-down, by definition, must be a 5-wave pattern. We count it as an expanded flat or a short wave-1 (of C-down) that is a fraction of the large and extended wave-3, followed by a similarly truncated wave-5 to potentially complete the decline at the current $2.46 mcf level. Wave-3 (of C-down) measures 1.618x waves 1 & 5 in a pleasingly precise pattern. Only EWT can predict price movements with such clarity. Likewise, EWT can provide measured moves in specific circumstances with high probability of fulfillment, based on its deterministic pattern relationships intimately tied to Fibonacci ratios.

Our proprietary Supply/Demand models suggest that Ngas is approaching an inflection point after a sharp selloff starting in November. Weekly models show a very extended sell signal that is due for a reversal and new buy signals. We note here that weekly charts suggest that any rally in the coming weeks could also be a corrective move in a larger bear market. Either way, our outlook is for rising prices for Ngas into the Spring. Money flow is shifting from being very bearish to potentially signaling an upturn in institutional demand for the commodity. Interestingly, momentum of our Volume-Adjusted Price indicator is still bearishly falling. This may also be pointing to a longer term pattern that could turn bearish after our anticipated rally to complete a bear market that could span several months.

Supply/Demand Weekly Chart

Supply/Demand Weekly Chart (Source: Summit Analytic Partners Research)

Sell pattern is fully extended, suggesting a bullish inflection point soon as Supply (red) & Demand (green) converge

Volume-Adjusted Price Weekly Chart

Volume-Adjusted Price Weekly Chart (Source: Summit Analytic Partners Research)

Volume-Adjusted Price (VAP) (red) has turned bullish - signaling a surge of Buying power

Supply/Demand Daily Chart

Supply/Demand Daily Chart (Source: Summit Analytic Partners Research)

Sell extended - a little more time until Supply (red) & Demand (green) start to bullishly converge

Volume-Adjusted Price Daily Chart

Volume-Adjusted Price Daily Chart (Source: Summit Analytic Partners Research)

Momentum (green) diverged bullishly - VAP (red) is retesting key support

Risks

Ngas is a volatile commodity that is subject to powerful political and strategic forces. The rapid development of LNG infrastructure, in just one year, demonstrates a high degree of commitment to redirecting suppliers away from recently completed Nord Streams 1 & 2. Under the prior Merkel government, Germany capitalized on the promise of cheap and plentiful clean energy delivered via pipelines from Russia. The US objected strenuously but was overruled, leaving Germany, and by extension, Europe, dangerously exposed to Putin's brinksmanship. Ukraine was well aware of the risks following the politically motivated shutdowns of gas delivery from Russia in years past. Germany has remarkably broken its dependence on Russian Ngas since August, but only with severe conservation efforts across the country. Any diminution of the will to comply or colder weather could change the equation materially for Europe.

Another risk is that Putin successfully executes a new offensive before NATO can deliver promised heavy weapons that could turn the tide for Ukraine. With warmer weather only weeks away, both Russia and NATO need to bring off what would be a major coup against the other. The logistical challenges change the nature of the conflict in a big way: NATO needs to mobilize dozens of tanks from multiple locations and deliver them hundreds of kilometers to forward bases in Ukraine. Russia will certainly take aim at these potent offensive weapons before they can reach the front lines. Likewise, Putin will need to pull off a complicated and difficult mobilization of large numbers of troops and heavy weapons across contested ground. US supplied advanced, asymmetric weapons such as the lethal Javelin anti-tank missiles and Himars highly accurate, short-range artillery are poised to strike at the long supply lines that are the soft underbelly of any armored offensive.

A third risk to our outlook is that inflation, and therefore Central Bank intervention to further slow economic activity levels, reverses its rapid decline following the June CPI peak at nearly 20% (using the same methodology employed in the late 1970s inflationary era). We hear from industry sources that supply chains are still transitioning higher costs through value chains, likely resulting in a rebound in inflationary cost increases over the coming months. For example, a recent survey indicated that a remarkable 63% of Millennials expect to change jobs for higher pay this year; 55% of older workers have similar expectations (Millennial Survey). If inflation surges after a brief respite, Central Banks would need to raise rates further to destroy excess demand. The odds of precipitating a recession would grow exponentially in our view, resulting in weaker demand and limiting the upside for energy prices.

BOIL is an ETF, something we usually don't recommend for a variety of reasons. One reason is that these ETFs tend to have only 20-30% of the underlying securities with the balance in derivatives. This represents a significant risk, in our opinion, due to past experiences during times of duress in financial markets such as the GFC. During a crisis, futures and derivative markets may lose depth of the bid side of the market because everyone wants to sell at the same time. ETFs have the option of paying in-kind or in cash during periods of heightened withdrawals. That means holders may not be able to sell and instead receive delivery of underlying securities at the worst possible time. Also ETFs can develop tracking errors leading to underperformance. Leveraged ETFs like BOIL can also experience 'futures rollover' losses that can significantly erode position values. These tend to be short term trading vehicles, which why we prefer futures contracts for those who can employ them or Ngas stocks such as CHK or LNG. Caveat Emptor...

The Trade

We believe that Ngas is poised to rally over the next several weeks to months. RSI is diverging bullishly on both hourly and daily charts. Our Elliot Wave count, as explained above, calls for a potential rally that targets $4.90/mcf (50% retracement) and $5.90/mcf (.618 retracement). Our proprietary Supply/Demand models show a late stage sell signal that is close to inflecting into a potentially powerful buy signal. Money flow also shows a what could be a shift in institutional selling to a more constructive pattern. Further information about our technical call is available upon request.

Conclusion

We believe that Ngas can rally substantially over the next several weeks to months based on a combination of seasonal factors, the ongoing war in Ukraine, the belated uptick in drilling and technical patterns. The risk is that the global economy stalls and industrial demand for Ngas could fall more than expected. Also a warm winter could negatively impact our outlook for Ngas. We think the rally could begin soon, but recognize that we may be a bit early for our models to transition to buy signals.

Additional Information Available Upon Request

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.