The wacky world of natural gas!
It's been a crazy year for NG and it has fallen every November since 2017. Will it repeat?
I have purposely never written here about natural gas because it can be a very difficult trade due to its large gap moves, especially over the weekend. The leveraged ETFs, BOIL and KOLD, can move up to 10-20%. That’s simply more risk and worry than most investors want or can handle.
“In the world of financial markets, a widow maker is an investment that results in large, potentially devastating losses. It can also refer to a trade that results in a loss for virtually everyone who tries it. In colloquial usage, a widow maker refers to anything with the potential to kill someone quickly.” NG is often referred to as a widow maker.
This past year has been particularly eventful with crazy moves up and down. The hard move up this past spring can largely be attributed to world NG prices as a result of Russia’s war on Ukraine, but U.S. export capacity is limited (and maxed out), so prices in Europe should be irrelevant to U.S. prices. Reality doesn’t always have any impact on prices.
So where is it headed next? I say lower, but I’ve been saying that for a year now. Clearly I’ve been right and wrong. Note the reversals tend to be very sudden. Looking back in time, NG fell in November each of the last 4 years. Will it repeat?
It only rallied twice in November since 2014 and I don’t know what the supply and weather conditions were those 2 years. And note that prices have typically been much lower than the current price.
This past week was particularly eventful with crazy moves in alternating directions. Here’s a look at the long leveraged trade with BOIL.
The gaps are virtually impossible to predict, but if you get in the trade during the day and stay in when you’re up, then the odds are in your favour. Knowing what’s a ‘BS’ move will also help you sell and take gains versus staying long. I was pretty sure Monday’s big move up was completely BS, so I was happy to buy more KOLD, the leveraged short ETF. It turned out to be a good call with BOIL gapping down -9.8% and KOLD gapping up the same amount. I eventually sold most of my shares bought Monday, just to be safe. I totally wasn’t expecting a similar reversal the next day, but was happy to re-buy shares in KOLD.
Friday’s move makes no sense, but if it happens during trading hours, then simply take advantage of the move without asking why it’s happening. I think it’s completely BS, so I bought some KOLD late in the day. Unfortunately, I was busy working and didn’t buy BOIL on the day. Here’s a view of KOLD since May. With 2 moves over 150%, it’s worth the effort to try and get a third with a large position.
The main factors in determining the price of NG in the U.S. is simply storage levels and weather. It’s actually kind of ridiculous for the price to swing so violently since the storage level is always within the 5-year average and the weather is also pretty average overall.
Every Thursday, the EIA reports weekly injection levels and provides a chart that shows current and past storage levels. The ‘low’ storage levels this year were clearly a contributing factor in the high prices, along with the irrelevant EU factor. Storage is now rapidly approaching the 5-year average and will undoubtedly over shoot to some degree. This should push prices lower, especially if the weather remains warm.
Checking NG production levels is also important and they’re currently at all time highs of nearly 100 bcf/d. It’s also useful to look at NG prices in future months. The March 2023 price is currently 5.87, quite a bit lower than the current price of 6.40, and much higher than prices since 2008.
Are higher prices expected long term? No. The EU is focused on expanding renewables, like wind and solar. NG supplies to make up for losses from Russia are not really long term, plus they will largely come from Norway and the Mediterranean, not the US. According to the EIA, “U.S. consumption of natural gas will average 87.9 billion cubic feet per day (Bcf/d) in 2022, up 3.9 Bcf/d from 2021, reflecting more consumption across almost all sectors.” With production now 100 Bcf/d, there isn’t a significant shortage in supply. Still, prices could shoot higher, so caution is advised when going short. Here’s what happened to nickel in April.
March 8, 2022, “Moscow's invasion of Ukraine and the west's moves to sanction Russia, a key major supplier, have electrified an already bullish nickel market. Prices doubled to a record above $100,000 per tonne in a matter of hours on Tuesday, prompting the London Metal Exchange (LME) to halt trading. It is up nearly 400% so far this year.”
“One of the world's biggest nickel and stainless steel producers, Tsingshan started building a short position -- a wager that prices will fall -- in the nickel market last year.” Even those with intimate knowledge of a commodity can get caught in a short squeeze.
I doubt NG will see such a major short squeeze, but anything is possible, so simply be aware of the fact that you could wake up one morning and KOLD could be down 90%. In 2020, it happened to oil longs when the price went to nearly -$40.
I was long oil while it was under $20, since it was ‘obviously’ going to go higher. The week before the historic Monday drop was particularly volatile, not unlike NG this past week, and the drop occurred prior to the markets opening, so there was no chance to sell my long position. The leveraged ETFs were then broken as well, so there was no chance to buy more to recover losses. Yes, you could have bought a non-leveraged ETF, but even they changed from covering front month prices so the money and opportunity were effectively lost.
If I haven’t yet completely scared you off from trying to short NG, then you can follow me with my short. On Wealthsimple, my trading platform, you can’t buy KOLD, but you can buy BOIL. The Canadian 2x leveraged equivalents HND/HNU perform just as well, and sometimes better, but, with lower volume, wider spreads and stops that rarely execute, they’re not great to trade. Thus, I plan to hold HND and trade BOIL. If NG moves higher and HND drops, I’ll be watching for a chance to buy a large position.
Monday is a complete unknown and I will update this article to track the trade as it progresses. On other fronts, I updated “Short the Dow with SDOW.” It had a lively week up and down as well. I’m out but watching for the markets to pull back further. Gold, oil and copper all moved up sharply on Friday, with the USD dropping. I took the opportunity to sell some KRR with it up 11.0% on the day and +17.5% from the open/low of 2.75 on Thursday. I’ve been trading a chunk of it since writing “Get Ready to Back Up the Truck” on July 17, priced at 2.77. It repeatedly ranged from 3.00 to 3.40s in August, providing very nice repeated gains, then fell to 2.38 in September, a completely BS move so back up a second truck, then 6 days later sell for a quick gain of 30% at 3.10. A few weeks later it was back to 2.51 with gold taking another bashing. Back up that second truck again and sell 5 days later at 3.12 (+24.3%). Now you’ve potentially doubled your money or better since July and it hasn’t even left the parking lot. Taylor Dart now says IAU is even better than KRR.
Monday, Nov. 7 update: Well, the wackiness continues! NG opened way up, for whatever reason, and BOIL was up 13.1% at the open. Clearly you don’t want to buy with it up 31.8% from Friday’s low, but you could be ready for a follow through higher, and it did indeed push up another 6.3% to the high after 11am.
Holding KOLD from Friday was a bad gamble, as expected, but you don’t want to sell straight away off the open either. Give it a chance to rally and if it doesn’t, then sell and watch for the bottom.
KOLD fell for the first 5 minutes, then made an early high of 14.46 in just over 15 minutes. I gambled with a stop sell at 14.30 and once it triggered, I put in a stop buy at 14.50 (+1.4%). Risking 1.4% is pretty small compared to sitting through another 15-20% drop. Then, you lower the stop. I could have tightened it up after 11am when others were buying more (they hadn’t sold), but I left it at 13.50 (-5.6% from my sell at 14.30).
A reversal was likely since the move up in NG had no fundamental justification, and sure enough, KOLD moved up 19.2% from the low to the high late in the day. Locking in that gain would make a lot of sense, but locking in the daily gain with BOIL on Friday also made a lot of sense. I missed getting a sell at 15.50 of extra shares bought at 14.60, so we’ll see tomorrow if that was lucky or unlucky. I think NG will go lower, eventually, so even if it opens higher tomorrow, I’ll simply trade the day the best I can.
You can follow the daily chatter of a group on Seeking Alpha here. Careful not to let the loudest voices distract you from your strategy! Also, as I noted in the comments, JC sold BOIL : +50.7% in 8 sessions, [R5+ | PPO-], $34.7 → $52.3 (bought 2022-10-27), [RQ~15.8%]. It’s really amazing how consistent and profitable his trades are.
Saturday, Nov. 26, update: After another wacky week for NG, with it powering up to 7.59 on Wednesday after 9am and started falling to the open at 9:30. KOLD obviously opened way down but it was a perfect opportunity to buy a large position, watch it closely, then let it ride if it moves up sharply.
Ideally you were holding BOIL for the full run up from Nov. 16, but logically you would have sold on Nov. 22 when NG dropped hard briefly. Now, you either took the win of 13-15% on the day with KOLD, or you decided to risk losing that for a chance at a continuation to the upside.
I think the price of natural gas and coal is ridiculously high and the best cure for high prices is high prices. I remember when coal stocks were down to $10 from highs of $100. I traded them for a while, thinking the world still needed coal, then the prices fell some more and I stayed out. At $3, many people said the companies were incredible bargains and I replied that they could easily go to $0, and many did. Since 2010, coal prices have ranged between $50-$120/ton. In August, 2020, prices turned up from $50 and didn’t stop till $225 in October, 2021. Coal hit $430 in September and has fallen back to $348.
Oil went up to $130 this year and has fallen back to $78. Copper topped $5 and fell back to $3.13. Both are now within their range for the past 10 years.
Note how crude oil recovered from the extreme low in 2020. Coal is still miles high, as is natural gas.
So, do the fundamentals really support the current price for natural gas (and coal)? First of all, the loss of natural gas supply to Europe from Russia has been the big news item, but looking at the EU storage levels tells a very different story.
EU storage levels started falling below the 5-year average in April, 2021 and were significantly lower by the summer 2021. I suspect this was a political issue and very bad planning, expecting renewables to supply all their energy needs. If the war in Ukraine was really the problem, then storage levels would have continued lower, but instead, levels returned to normal and are now well above normal, 90% full.
In 2020, when oil storage was nearly full, that, and other issues, pushed prices down to $20 and then a crazy low of -$37 at the close of a monthly contract. US storage levels are essentially at the 5-year average, so prices should be back to average, which has been about $3-3.50 since 2010. Projected EU inventories are high as well.
EU natural gas prices topped out around 338 EUR/MWh, then fell hard to around 100 in late October and have remained there. So what inspired the spike in natural gas prices in the US? I don’t know, but it seems logical that prices will fall. Regardless, the key is to continue trading BOIL and KOLD effectively and ignoring any biases you may have. The power of compounding returns is undeniable as I wrote last week, “Simple math paints a clear picture.“
Update for week Dec.5-9, 2022: The wackiness continues and taking gains at extremes is providing fantastic compounding returns. NG dropped hard from 7.35 on Nov. 29 to 5.35 late on Dec. 6. It then rallied up to close the week at 6.30.
I remain convinced that it makes sense to trade a large portion of your holding and you don’t need time to build a large position. Greg still believes the opposite, as it has served him well for many years. He has had several swings of -$300k to +$300k in a week, and he now has a new record of -$600k to +$600k as KOLD went from 10.35 open on Nov. 23 to 22.59 high on Dec. 6, that’s just over $12 on 100k shares, so a swing of just over $1.2m. Wow!! And then back to slightly underwater at the close of 16.07 on Friday.
For me, if I was holding a very large position in something this volatile, then I would focus on it and trade it the best I can. Greg is excellent at trading. It’s simply a matter of choice he makes with large positions based on fundamentals, and he says he would only trade $100-$200k. I don’t see the reason to not trade when you have over a million dollars on the line. We all really appreciate Greg’s transparency and thoughts, as it helps us decide on our own strategies. His target is a million dollar profit, and I hope he gets it.
Update for Mon. Dec. 12, 2022 to year end: The wackiness finally ran its course with the NG bears finally winning out over the bulls. NG gapped lower to start the week, as one may have suspected it would. Greg bought 10k KOLD on Tuesday at 12.86, now back underwater, $409k (-24.8%) and that turned out to be bottom. The bears then took over and Greg sold on Dec. 22 at 22.90 for a $796k profit. “I decided to be a whimp and not go for the million profit.” In October, he sold a day early, and if he had waited an extra day this time he would have gotten his million dollar profit.
The question for each of us is whether we want to trade in such a fashion. Greg swears by it, but I don’t like giving up a 30% profit and continue holding till I’m 30% underwater again with an even bigger position. I then won’t be happy selling for a gain of 41% in 2 months, when I could have gotten +114% in just over 2 weeks and over 300% compounded returns over 2 months.
I’ve had a really difficult time this past week trying to decide where NG is likely to go next. The weekly chart at Christmas suggested we may have reached support, but we broke through that and it could easily fall to $4 or $3.60.
A big question is where are worldwide LNG prices going and I don’t have an answer for that either. Given that prices in Asia were falling from 2015 till July 2020, I’m inclined to believe we will return to around US$10, which is considerably lower than current prices.
Here are some interesting facts. Countries with largest liquefied natural gas (LNG) export capacity in operation worldwide as of July 2022 (in million metric tons per year) : Australia 87.6, Qatar 77.4, US 73.9, Malaysia 31.5 … There are no new U.S. LNG export facilities scheduled to come online in 2023. Once completed, the three export projects under construction will expand U.S. LNG peak export capacity by a combined 5.7 Bcf/d by 2025 from 12.3 Bcf/d. (Current US production 100 Bcf/d.) Meanwhile in Qatar, “the North Field expansion will boost Qatar's LNG output by 64% by 2027, strengthening its position as the world's top LNG exporter and help to guarantee long term supply of gas to Europe.” That’s a lot of new LNG coming online, which will inevitably impact prices.
In the meantime, get ready for a brief rally in US prices in January or February when cold weather hits and take the trade with BOIL. Greg started his position on Dec. 28 with 10k at 18.50, then added 10k on Dec. 30 at 17.51.
Well, NG made its typical Monday surprise, way up, for whatever reason. JC sold BOIL: +50.7% in 8 sessions. I sold HND on a stop off the early rally and then re-bought on the way up from the low, saving myself 5%, then bought some extra as it held and moved up. This late move up looks promising, so I'll hold it all overnight and hope for a pop, rather than sell my low buys for a quick, small gain.