Natural gas can be as volatile as the energy commodity is combustible in its raw form. The nearby U.S. natural gas futures for delivery in the Henry Hub in Erath, Louisiana, fell over 40% in 2023, settling at around the $2.50 per MMBtu level. While the 2023/2024 peak demand season began in late November, natural gas prices did not experience a seasonal rally until early January. The U.S. Natural Gas Fund (UNG) moves higher and lower with volatile U.S. natural gas futures. The Bloomberg Ultra Natural Gas 2X ETF (BOIL) magnifies price action on the upside but also falls more than the natural gas price during bearish periods. The Bloomberg Ultrashort Natural Gas -2X ETF (KOLD) is the converse product, magnifying downside price action while quickly shedding value when U.S. natural gas futures rise. 

Inventories have been bearish

U.S. natural gas in storage peaked at 3.836 trillion cubic feet at the end of the 2023 injection season, the highest level since 2020 when they reached 3.958 tcf. Since late November, stocks have declined but remain at high levels compared to the past years. 

At 3.476 tcf, U.S. natural gas stockpiles as of December 29, 2023, were 18.9% above the previous year’s level and 13% over the five-year average for late December. There is plenty of natural gas in storage across the United States to meet the winter demand. Over the past weeks, high inventories and seasonally warm temperatures had weighed on NYMEX natural gas futures prices. 

The ten-year chart highlights that nearby natural gas futures were just above the $2.50 per MMBtu level in late December 2023, the lowest level in December since 2019. The rallied to over $3.20 per MMBtu in early January.

European prices will influence U.S. prices

When the NYMEX rolled out natural gas futures in 1990, the energy commodity was primarily a domestic market, with transportation limited to the North American pipeline. Massive discoveries of natural gas in the Marcellus and Utica shale, advances in fracking to extract gas from the earth’s crust, and technology that liquefies gas for export via ocean vessels have changed U.S. natural gas’s supply and demand dynamics. 

The ability to ship LNG makes the U.S. natural gas futures far more sensitive to Asian and European prices. Meanwhile, Russia’s 2022 invasion of Ukraine caused European prices to spike to record highs, which pushed U.S. prices to over $10 per MMBtu for the first time since 2008. Western Europe depends on Russia for natural gas supplies. The Russians and the U.S. are the world’s leading natural gas-producing countries. 

The ten-year chart of U.K. natural gas futures shows the explosive move to the 2022 high and implosion to lows in May 2023. While U.K. natural gas has moved higher, it remained under pressure in December 2023 and early 2024 as warm temperatures have not caused the demand to rise appreciably. 

Dutch natural gas futures display a similar price pattern. While European prices are not putting upward pressure on U.S. natural gas prices in early January, the ongoing war in Ukraine could suddenly cause them to spike higher. Any significant move in U.K. or Dutch natural gas futures would likely impact the U.S. NYMEX Henry Hub futures. 

The most recent rally in U.S. natural gas occurred as frigid temperatures and snow swept across the country. 

Risk-reward favored the upside- Use caution as natural gas futures can explode or fall below zero

Since 2009, nearby NYMEX natural gas futures have traded as low as $1.44 in 2020 and as high as $10.028 per MMBtu in 2022. At over the $3.20 level on January 9, that range over the past years implies a limited downside and the potential for significant rallies. However, natural gas futures, like oil, always have the potential to fall below zero when those holding long contracts at delivery cannot secure storage for their gas. In April 2020, nearby crude oil prices spiked lower to negative $40.32 per barrel, as there was nowhere to put the petroleum. Since U.S. natural gas ownership depends on storage and pipeline transmission, the downside risk is not limited to zero. 

Support and resistance levels

The six-month chart shows the bearish trend caused by warm temperatures and high inventories over the past weeks. 

Technical support in nearby February NYMEX natural gas is at the December 13 $2.187 low, with resistance at the late October and early November $3.792 per MMBtu double top high. 

While the trend over the past weeks had been bearish and ugly, there was plenty of room for a recovery. At around the $3.20 level on January 9, nearby futures have made higher lows and higher highs since mid-December.  The most significant move occurred on January 9.

The alternative to the futures arena for nimble traders

Natural gas can be a highly volatile commodity, and futures involve significant leverage. At the $3.20 level, one NYMEX futures contract has a $32,000 value. Original margin is $6,050, meaning a 18.9% down payment controls $32,000 of the energy commodity. The maintenance margin is $5,500 as long and short positions are marked-to-market daily.

Those seeking natural gas exposure without venturing into the highly leveraged and volatile natural gas futures arena can turn to the ETF market:

• The United States Natural Gas Fund (UNG) is unleveraged and moves higher and lower with U.S. natural gas futures prices. At $6.51 per share on January 9, UNG had nearly $1.12 billion in assets under management. UNG trades over 27.1 million shares daily and charges a 1.11% management fee. 
• The Bloomberg Ultra Natural Gas 2X ETF (BOIL) provides double leverage to UNG. At $38.56 per share on January 9, BOIL had over $818 million in assets under management. BOIL trades an average of nearly 9.34 million shares daily and charges a 0.95% management fee.  
• The Bloomberg Ultrashort Natural Gas -2X ETF (KOLD) is the bearish complimentary product to BOIL, moving higher when natural gas prices fall.  At $69.73 per share on January 9, KOLD had around $138.4 million in assets under management. KOLD trades an average of over two million shares daily and charges a 0.95% management fee. 

The BOIL and KOLD ETFs are leveraged, so they suffer from time decay. Price and time stops are necessary when using these vehicles to position on the long or short side of the natural gas futures market. UNG is not leveraged, but the seasonality, volatility, and significant price differences for deferred delivery months are reasons for time and price stops when using the unleveraged product. 

Natural gas is going into 2024 in the same bearish trend since the August 2022 high. However, the price had declined to a level that favored the upside in 2024, causing a seasonal rally to over $3.20 per MMBtu in early January. The weather over the coming weeks will dictate the energy commodity’s path of least resistance.  

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