My template for trading natural gas futures

Exploiting a systematic trading opportunity by providing an insurance function for utilities and consumers.

Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.

---

BOIL 0.00%↑ is an ETF that buys natural gas futures with leverage and rolls them at the settlement date. As I will explain below, the term structure of natural gas futures is typically upward sloping (contango). This creates negative drift for the ETF as it regularly buys expensive futures contracts and rolls them at a lower price later. There is a systematic reason why this has to have a negative payoff over time which can be exploited. In this article, I will explain why.

---

What is BOIL?

This ETF seeks to generate 2x the return of the Bloomberg Natural Gas Subindex on a daily basis. To achieve that goal, it uses a predetermined roll schedule that will move expiring contracts into contracts that are two months out then holds the contracts for two months. It’s currently 200% allocated to the March 2024 futures contract. The cash collateral is invested in Treasury Bills.

The uniqueness of natural gas consumption

When you need gasoline for your car, you drive to the gas station and pay spot. You pay the price that is dictated by world markets. When you buy milk, you go to the grocery store and pay spot. Prices may not change as rapidly as for gasoline, but they do quite often and you simply accept the grocery store’s quote every time you go there. You do the same for almost all physical goods that you consume.

However, if you are like most people, you don’t do that for natural gas. Instead, you have an agreement in place with your local utilities provider that guarantees you to pump gas directly into your furnace on demand for a fixed price per period, typically one year. From a rational perspective, I have no idea why this is so different from other consumption. After all, what would stop people from entering into a similar agreement with Shell for their gasoline needs? But it is what it is and this can be exploited.