On August 31st, Russia's state-owned energy company, Gazprom, stopped the flow of natural gas in the Nord Stream 1 pipeline. The pipeline ran from Russia to Germany and was scheduled to be discontinued from August 31st until September 3rd. But September 3rd came and went, and the pipeline remained shut down.
At first, an oil leak was reported, causing the pipeline to remain shut down. But then, it was evident that the shutdown was in retaliation to the sanctions the West had implemented against Russia due to the war in Ukraine.
Many experts predict the economic pain in Europe will increase as the cold weather sets in across the continent. Some have gone as far as to say that the economic pain will be felt in both the coming winter and next winter, 2023-2024. Some are even saying that energy rationing will be required to ensure everyone has enough natural gas for heating.
However, many in Europe have been planning for this to occur for some time. Russia had reduced the pipeline operating volume to just 20% of what it could provide.
This was far less than what Europe comfortably needed to make it through winter. Thus, the European Union and other entities have been working on replacing the lost volume through other means. So while the pipeline shutdown is not ideal, it was predicted to happen at some point this winter.
Many are saying Russia is attempting to weaponize its gas supply to hurt the EU and other nations in an attempt to have Western countries drop or reduce sanctions against Russia.
At this time, there is no sign that either the EU or Russia will bend to the will of the other, and it is likely that we will continue to see elevated oil and gas prices in Europe. Thus, comes the opportunity for savvy investors.
I want to note that I am not condoning an attempt to profit from someone else's pain and suffering. I want to point out the high likelihood that natural gas prices will likely increase this winter as the EU finds ways to replace the gas they acquired through the Nord Stream 1 pipeline.
With that all said, let's look at a few of the options you have if you want to invest with the idea that gas prices will rise this winter.
The best way to invest in natural gas is with Exchange Traded Funds. Something like the United States Natural Gas Fund LP (UNG) or the United States 12 Month Natural Gas Fund LP (UNL). These funds buy futures contracts on natural gas.
UNG holds near-term monthly futures while UNL holds the 12 nearest months contracts. Owning the futures contracts gives the ETFs exposure to the price movements of the commodity. Gas prices go higher; the contracts are worth more. But, the same happens if gas prices go lower. UNG and UNL will essentially move at a 1X leveraged amount to the gas price before fees and contango occur.
The Proshares Ultra Bloomberg Natural Gas ETF (BOIL) will give you a 2X daily return on natural gas price movement. That means if natural gas increases by 1%, UNG and UNL will move about 1%. But, BOIL will move by 2%.
Finally, if you feel like the price of natural gas is overinflated, you could buy the ProShares UltraShort Bloomberg Natural Gas ETF (KOLD), which will short the price of natural gas. So, if gas falls by 1%, KOLD will actually increase by 1%. But again, the opposite is true, and if gas prices rise by 1%, KOLD will lose 1% of its value.
Now before you buy a natural gas ETF, it should be noted that these funds, besides KOLD, are all up a lot in 2022. This is likely because many investors were expecting Russia to cut off its supply eventually. However, that still doesn't mean that natural gas prices can't or won't go even higher than their current levels.
Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
