Natural Gas ETFs among the worst-performing equities
Brent crude has topped $90 per barrel for the first time since October, as Middle East tensions threaten to boil over into a wider regional war. Oil markets are increasingly pricing increased geopolitical risk after Iran promised retaliation following this week’s Israeli strike in Syria that killed high-ranking Iranian military personnel. Whereas the majority of analysts remain cautious with their oil price targets, commodity analysts at Standard Chartered have predicted that Brent will average $94 per barrel during the current quarter.
Unfortunately, the same cannot be said about natural gas markets. Warmer-than-expected winters for two years in a row have left gas markets awash with the commodity, taking a toll on gas prices and the equities that track them. A late cold snap has helped to extend the EU gas withdrawal season for another week; however, it’s unlikely to change the bigger picture after Europe exited the winter heating season with its highest level of natural gas inventories.
According to to data from Gas Infrastructure Europe (GIE), the EU’s natural gas storage capacity at the end of March was 68.59 billion cubic meters (58.7% full), 4.32 bcm higher than a year ago; 21.16 bcm above the five-year average and the highest level on record at the end of any winter.
The same scenario has been playing out in the U.S. gas market. Natural gas stocks for the week ended March 29, 2024 were 2,259 Bcf, 422 Bcf higher than last year’s comparable period and 633 Bcf above the five-year average of 1,626 Bcf.
Not surprisingly, natural gas prices have been hammered: European natural gas futures were trading at €26.6/MWh on Thursday, 50% lower than the 52-week high achieved in October while Henry Hub gas was quoted at $1.82/MMBtu, good for a 30% drop in the year-to-date. Exchange-traded funds (ETFs) that track natural gas have emerged as some of the worst performing equities in the current year.
At a time when the S&P 500 has climbed nearly 10% in the year-to-date, United States Natural Gas Fund, LP ETF (NYSEARCA:UNG) has declined 24.9% while the ProShares Ultra Bloomberg Natural Gas ETF (NYSEARCA:BOIL) is down 50.9%. The worst performing ETFs so far this year are those that bet against AI and GPU chipmaker, Nvidia Corp. (NASDAQ:NVDA): T-Rex 2X Inverse NVIDIA Daily Target ETF (NVDQ) has cratered 74.3% YTD while GraniteShares 2x Short NVDA Daily ETF (NASDAQ:NVD) has tanked 72.2%.
Interestingly, betting against natural gas has become a smart play with the ProShares UltraShort Bloomberg Natural Gas ETF (NYSEARCA:KOLD) up 47% YTD and 88.6% over the past 12 months. KOLD seeks daily investment results, before fees and expenses, that correspond to two times the inverse (-2x) of the performance of the Bloomberg Natural Gas SubindexSM for a single day.
Russian Gas Cuts
With the current inventory levels, it would take an extraordinary set of circumstances for Europe to run out of gas any time soon. Still, there could be some reprieve coming for gas bulls.
Four years ago, Russia and Ukraine signed a five-year pipeline transit agreement to supply natural gas to EU countries. So far, both countries have continued to honor the deal despite war still raging in Ukraine. However, the EU will have to contend with even less Russian gas after Ukraine signaled it has no intention to renew the deal when it expires at the end of the year, while the EU executive says it has “no interest” in pushing to revive the agreement. Ukraine gas amounts to 5% of total EU gas imports, by no means insignificant.
And now, the EU is warning member countries to prepare for a world where the loss of Russian gas is accompanied by a harsh winter. Aura Sabadus, a senior analyst at the ICIS market intelligence firm, has told Politico that Austria, Hungary and Slovakia are likely to be the hardest hit when the imports are cut off. The situation is further exacerbated by the recent decision by Berlin to unilaterally tax gas exports, making it harder for these countries to swap Russian imports for supplies coming via Germany, Italy or Turkey.
“We should avoid steps that will damage the work done and strengthen the Russian aggressor,” Czech Industry Minister Jozef Síkela has said of the levy.
The EU executive says losing Russian supplies through Ukraine may lead to higher transport costs while storage levies imposed between the bloc’s countries could “make this diversification more difficult and costly.”
