One could be BOIL’ed to death

Natural gas has been in a bear market for a few years since 2015, during which it had never gone up beyond $4 and actually mostly below $3. It was the same for most of 2018 as gas prices sat in a narrow trading range significantly below the five-year average. However, in November prices suddenly surged as much as 41 percent, thanks to the frigid weather that stoked concerns about supply shortages ahead. See the one-year chart below about the natural gas prices.

Naturally traders got excited and as always a FOMO occurred by chasing it to the moon. When this kind of euphoria developed, I think many people will get killed if they are just blindly follow the crowd or herd! Personally I think we have likely seen the highs for gas and if anything, a trending down in the months ahead is more likely than going further up. Two main reasons:

For one, the dramatic surge of the gas prices in the past few weeks has likely priced in the worst scenario regarding the potential weather related supply shortage. Then if the weather is not so cold in the coming winter season, the hype for gas will quickly regress. And the froth will be squeezed out as fast as you can imagine.

More imminently per Bloomberg,  tomorrow (Dec 6)  the OPEC, the Economic Commission Board for the global oil cartel, “will meet in Vienna to decide whether to curb crude output to help raise oil prices that have fallen by more than 30 percent in the last two months. If the 15-nation group approves limits, it could give U.S. shale drillers added revenue to boost their output of both oil and the gas that’s pumped up alongside it. The more gas, the lower the price.” So what will happen if they don’t cut the oil output limit? Bloomberg again, “Conversely, if the Organization of the Petroleum Exporting Countries and its allies decide against limits, it may take the gas market six to 12 months to see a slowdown in the existing flow of gas. That’s because it takes time it takes time to eliminate working rigs and let oilfield services contracts expire.” In other words, the current supply already priced in will not be immediately impacted much if OPEC keeps the current output limits. But if the decision is to curb the output, then likely more companies from the US which are not bounded by the OPEC decision will try to boost more gas production to get more revenues and in turn will bring down the gas prices moving forward.

I think the risk to the downside for gas is significantly outweighed that to the upside and we may see an immediate market reaction as early as tomorrow! There is an ETF for the gas sector called “BOIL” (how  metaphorically it is!) Its price action in the past month was also parabolic in line with the gas prices. It has already been cooling down a bit but I think it will tank if what I outlined above materializes. That’s why anyone who was chasing BOIL to the moon will likely be boiled to death or at least badly burned in the near future, if not immediately! Hope you are not one of those!! Frankly, I’m holding a short position for gas via UNG and I’m confident it will be very profitable in the months ahead.