In June 2020, close by NYMEX pure fuel futures costs fell to the bottom stage in 1 / 4 of a century at beneath $1.50 per MMBtu. Two years and two months later, the power commodity probed above the $10 per MMBtu stage for the primary time since 2008. Pure fuel is just not for the faint of coronary heart.
In 2022, close by pure fuel futures traded in a large $6.39 vary, practically 4 and one-half instances the June 2020 low. Whereas U.S. futures costs stopped properly wanting the document excessive European fuel costs established new all-time peaks in 2022 as Russia, the main provider of the continent’s fuel, used the power commodity in opposition to “unfriendly” European nations supporting Ukraine.
In late 2022 and early 2023, fuel costs plunged, with the worth of NYMEX futures falling to $3.52 per MMBtu and European costs falling because the winter has been unseasonably heat.
The US Pure Gasoline Fund (NYSEARCA:UNG) is an unleveraged ETF product that tracks the short-term value actions in U.S. pure fuel futures. The ProShares Extremely Bloomberg Pure Gasoline product (BOIL) and its bearish counterpart (KOLD) turbocharge UNG’s value motion on the up and draw back.
From over $10 to underneath $4 in 5 months
Buying and selling pure fuel is just not for the faint of coronary heart, and the worth motion will be as wild as driving a psychotic horse by way of a burning barn. After reaching a 25-year low at $1.44 per MMBtu in June 2020, the worth rallied practically seven-fold to a 14-year excessive in August 2022.
The chart highlights pure fuel’s rise that took the worth to $10.028 per MMBtu in August 2022, the place it ran out of upside steam. Although it is the guts of the 2022/2023 peak winter demand season and excessive provide issues in Europe, close by U.S. pure fuel costs have dropped like a stone over the previous 5 months. The close by contract fell to $3.422 per MMBtu in early 2023, a 65.9% drop from the August excessive.
Seasonality: Pure fuel jumped in late summer time and tanked in early winter
U.S. pure fuel costs sometimes rise at the start of the annual withdrawal season that runs from November by way of March. Elevated demand for heating through the winter helps costs, and costs typically attain seasonal lows from March by way of the late spring and may rally through the summer time because the cooling demand peaks.
Pure fuel changed coal in U.S. electrical energy technology, growing the power commodity’s demand-side fundamentals. Furthermore, the liquefication of U.S. pure fuel now permits it to journey the world on ocean vessels to areas with a lot greater costs. Earlier than LNG, the North American pipeline community restricted the addressable marketplace for U.S. pure fuel provides.
In the meantime, large discoveries of pure fuel reserves within the U.S. Marcellus and Utica shales elevated the power commodity’s supply-side fundamentals. The U.S. pure fuel market matured because the CME’s NYMEX division launched futures contracts in 1990.
In 2022, close by pure fuel futures traded in a $6.39 vary from low to excessive, essentially the most expansive since 2008, as 2022 was no unusual yr in pure fuel and markets throughout all asset lessons.
Geopolitics have brought about explosive and implosive value motion
In 2020, the world’s main pure gas-producing nations had been:
The U.S. and Russia had been, by far, the main producers. Whereas the U.S. produces extra pure fuel than Russia, Russia was the highest exporter in 2021.
Russian pipelines to Europe make it the power commodity’s prime exporter.
The conflict in Ukraine, sanctions on Russia, and Russian retaliation in opposition to “unfriendly” nations supporting Ukraine distorted pure fuel costs and flows in 2022 and 2023. Whereas U.S pure fuel futures costs fell wanting the document excessive from 2005, European costs exploded to all-time peaks final yr.
The chart reveals that U.Ok. pure fuel costs reached a document 800 in March 2022. On the 160.63 stage on January 11, the costs stay greater than the pre-2021 117 document excessive from November 2005.
Pure fuel in The Netherlands rose to a document peak on the 345 stage. At 65.346 on January 11, they’re nonetheless greater than the pre-2021 31.15 excessive.
A heat winter in Europe has brought about costs to say no. Nonetheless, the conflict in Ukraine and NATO’s assist have saved costs in document territory as Russia makes use of pure fuel and different commodities as financial weapons. Pure fuel has grow to be the power commodity within the eye of the geopolitical storm. In the meantime, the U.S. pure fuel LNG enterprise remains to be a burgeoning enterprise with restricted capability to fill the European demand void. Furthermore, U.S. pure fuel inventories had been beneath final yr’s stage and the five-year common on the finish of 2022.
The chart reveals at 2.891 trillion cubic toes, pure fuel in storage throughout the U.S. was 9.6% underneath final yr’s stage and 6.7% underneath the five-year common as of December 30, 2022.
Pure fuel is again within the purchase zone
The conflict in Ukraine continues to rage, European pure fuel costs stay in document territory, and U.S. stockpiles are decrease than in previous years. Furthermore, U.S. power coverage underneath the Biden administration addresses local weather change by supporting various and renewable power manufacturing and consumption and inhibiting hydrocarbons, together with pure fuel. Power coverage has impeded oil and fuel fracking and drilling, resulting in much less output. In the meantime, costs have dropped like a stone, which could possibly be a possibility for nimble merchants with their fingers on the heart beat of the unstable pure fuel area.
The chart reveals the 61.9% decline of U.S. pure fuel for February supply as the worth fell from $9.587 in August 2022 to the $3.422 per MMBtu stage on January 11.
Peace is not going to probably get away in Europe any time quickly, and the demand for U.S. pure fuel will proceed to rise as Western European nations search to interchange Russian fuel with various suppliers. At beneath $4 per MMBtu, pure fuel affords worth. Whereas the worth may proceed declining, the draw back threat is much decrease than the upside potential in 2023.
UNG tracks close by pure fuel prices- BOIL and KOLD turbocharge already flamable power commodity
Essentially the most direct route for a threat place in U.S. pure fuel is through the futures and futures choices on the CME’s NYMEX division. Pure fuel is a marketplace for merchants, not buyers, as the worth variance will be hair-raising.
The merchandise accessible through the inventory market platforms present a substitute for the futures for these seeking to take part within the unstable pure fuel area.
The US Pure Gasoline Fund (UNG) is an unleveraged ETF product that strikes greater and decrease with close by pure fuel costs. Whereas UNG does a wonderful job monitoring the close by value, it’s not for long-term funding, as month-to-month value variations distort the ETF over time. At $11.72 per share on January 11, UNG had near $493 million in property underneath administration. UNG trades a median of over 10.125 million shares every day and expenses a 1.11% administration payment.
Close by pure fuel costs dropped from $10.028 in August 2022 to $3.422 per MMBtu in December, a 65.9% decline.
Over the identical interval, UNG fell from $34.50 to $10.89 per share, or 68.4%. The long-term chart reveals why UNG is inappropriate for long-term threat positions within the pure fuel futures area.
The long-term chart reveals UNG’s decay over lengthy durations due to the rolling from one month to the subsequent and the inherent seasonality in pure fuel costs.
Pure fuel is a commodity to commerce. For these seeking to turbocharge the worth motion, the ProShares Extremely Bloomberg Pure Gasoline product (BOIL) and its bearish counterpart (KOLD) present short-term double leverage on the up and draw back.
At $11.86 per share, BOIL had $546.247 million in property, trades a median of over 16.758 million shares every day, and expenses a 0.95% administration payment.
At $36.48 per share, KOL had $188.415 million in property underneath administration. KOLD trades a median of practically 8.885 million shares every day and expenses the identical 0.95% administration payment.
Pure fuel is essentially the most unstable power commodity, and cautious consideration to risk-reward dynamics is critical for fulfillment. Within the present atmosphere, costs underneath $4 per MMBtu are probably within the purchase zone.