“It’s Become Dangerously Big”: Two NatGas ETFs Own 30% Of Front-Month Futures Contracts

Over the past six months, investors have plowed billions of dollars into BOIL and UNG, two exchange-traded funds that follow natural gas futures. This surge in interest has resulted in a doubling of combined net assets for these funds in a very short period. However, the buying spree in the funds has raised alarms about potential destabilization in the underlying NatGas market, Bloomberg reported. 

BOIL and UNG have combined net assets of $2.1 billion, more than double the level just six months ago. The funds own about 30% of the front-month futures contracts for NatGas, which is extraordinarily high compared to other ETFs in other commodity markets. 

With such a significant position, these funds could induce volatility in NatGas futures if there was any forced selling or an explosion of buying by ETFs. 

Gary Cunningham, a director at Tradition Energy, an independent energy risk management and procurement adviser, told Bloomberg: “It’s become dangerously big.” He warned, “If something significant were to happen to it, its positions are so large that they can literally move the market.” 

Bloomberg pointed out, “ETFs aren’t supposed to move the market, just trade in line with the underlying asset. They’re designed to be highly liquid securities similar to stocks, ideal for giving investors exposure to commodities like natural gas that usually are traded by industry professionals using more complex futures and options contracts.” 

However, when these ETFs are too big, they can push the underlying market and drive higher volatility. Bloomberg noted this is what happened in 2009 and 2020:

 In fact, that’s what happened with natural gas in 2009 when speculators trying to profit from UNG’s need to roll over contracts helped boost volatility to a three-year high as prices surged. The fund was temporarily forced to stop creating new shares because it could no longer expand its holdings in futures markets. A similar occurrence came in 2020 when oil prices briefly went negative. The United States Oil Fund, a major ETF in the sector, was accused of contributing to market mayhem as it tried to roll over futures contracts amid volatile prices. Regulators eventually ordered the fund to change strategy in the wake of the turmoil.

The explosion of interest in the two funds comes as NatGas futures have tumbled more than 76% to around the $2 mark since last August on a warmer Northern Hemisphere winter, an abundance of supply in the US and Europe, and high production in the US.