Natural gas prices have recently rebounded by nearly 30%, increasing investor interest in exchange-traded notes (ETNs) that track them. As summer approaches and cooling demand rises, issues impacting natural gas prices, such as expectations for U.S. liquefied natural gas (LNG) exports and supply uncertainty due to the Russia-Ukraine war, seem to be stimulating investor sentiment.
However, experts advise that long-term investment in natural gas ETNs is risky. Recent international issues have already been reflected in natural gas prices, and investment products that track natural gas prices incur unexpected expenses due to their unique structure as futures.
The price of June futures for natural gas, which plummeted in April due to seasonal off-peak conditions and concerns over economic slowdown caused by tariffs from the U.S., is experiencing a short-term rebound, buoyed by expectations of increased cooling demand in the summer. The price of June natural gas futures, which dropped to $2.93 last month, rose to around $3.70 on that day. Related ETN products are also showing short-term rallies of around 10%.
According to a recent check by Korea Securities Computer Co. (KOSCOM), among the 10 exchange-traded notes (ETNs) with the highest price increases over the past week (from May 6 to May 12), nine tracked natural gas prices. Most leveraged products tracking natural gas futures show price increases in the 16% range, while ETN products that directly track natural gas futures are up about 8%.
Natural gas is a representative seasonal commodity, and its prices tend to decline due to increased inventory from February to April after winter heating demand ends. In contrast, from May to July, as summer electricity demand intensifies, inventory decreases and prices rise, leading the market to view this period as peak season.
Recently, the market anticipates that as U.S. President Donald Trump uses the Alaska LNG project as a bargaining chip in tariff negotiations, exports of U.S. LNG will expand, and related stocks are expected to rise. All domestically listed natural gas ETNs base their prices on U.S. natural gas stored at Henry Hub, meaning that if U.S. natural gas prices rise, the domestic ETN prices are likely to rise correspondingly.
However, the industry views that even a significant increase in Alaska LNG exports may not greatly benefit domestic investment product prices. Hong Seong-ki, a researcher at LS SECURITIES, noted, "The prices of Alaska LNG and U.S. domestic natural gas (Henry Hub) do not correlate, so there could be a significant price gap," and he explained, "It will take at least five more years before Alaska natural gas can be produced and sold."
There are also expectations that as supply of Russian natural gas to Europe is cut off due to the Russia-Ukraine war, U.S. natural gas will benefit from this as an alternative. However, this issue may not significantly drive up natural gas prices.
An energy sector researcher stated, "Most pipelines for Russian gas flowing to Europe are already blocked since the early days of the Russia-Ukraine war, and over the past three years, Europe has steadily increased its dependence on U.S. natural gas, so the anticipation regarding this may have already been reflected in natural gas prices."
Another reason why special caution is needed for investments in raw materials, including natural gas, is that most raw material investments are based on futures. If one does not consider 'rollover,' they might incur additional expenses due to rollover costs.
Rollover refers to the process of replacing a futures contract nearing expiration with a contract that has more time remaining, such as switching from June natural gas futures to July futures. In markets for raw materials like natural gas or crude oil, where storage costs are incurred, a phenomenon known as 'contango' occurs, making the prices for contracts further out more expensive, resulting in rollover expenses.
As a result, advice has emerged indicating that investments in raw material futures should primarily focus on short-term trading, as the monthly rollover expenses can eat into profitability.
Hong Seong-ki, a researcher at LS SECURITIES, stated, "Individual investors may think it's easy to simply buy natural gas cheaply and sell it at a higher price, but that's not actually the case."
He explained, "Because seasonal demand and other expectations are already reflected in the prices of each contract month, it's difficult to make a profit with a simple buy low, sell high strategy. Only if actual prices increase significantly above the currently formed contract month prices can one realize a profit after accounting for rollover costs."
Choi Jin-young, a researcher at DAISHIN SECURITIES, noted, "Natural gas has distinct seasonality, so it's important to accurately identify short-term trading moments," adding that after the rollover from June to July on the 20th of this month, price increases are expected alongside a decrease in inventory. Particularly as Europe enters an inventory accumulation phase and expectations for additional exports of U.S. LNG grow, he advised that a strategy of buying the June low, rolling over to July, and possibly liquidating in early August would be advantageous.