As natural gas prices continue to soar ahead of winter heating demand, leveraged exchange-traded notes (ETNs) betting on price gains are also posting returns of around 20%. However, given the high volatility of natural gas prices depending on average temperatures, inventory levels, and expected heating demand, there are cautions against excessive chase buying.
According to the Korea Exchange (KRX) on the 19th, from the 3rd to the 17th of this month, 8 of the top 10 ETNs by return were leveraged products betting on rising natural gas prices. All are products that track twice the daily movement of natural gas futures prices and recorded returns of around 20% during this period. During the same period, the KOSPI fell 3.14%.
Among the eight, the product with the highest return was the "KB Bloomberg Leveraged Natural Gas Futures" ETN, which rose 23.19% this month. It was followed by the "Shinhan Bloomberg 2X Natural Gas Futures" ETN at 22.86% and the "N2 Leveraged Natural Gas Futures" ETN at 22.68%.
According to the New York Mercantile Exchange (NYMEX) on the 18th (local time), natural gas futures prices stood at $4.36 per MMBTU (a heat unit), up 2.11% this month. The highest closing price so far this year was $4.49 on Mar. 10, and it has come close to that level for the first time in about eight months.
As the winter heating season begins, when seasonal inventory declines are expected, factors such as Europe's lower-than-usual gas inventories are seen as fueling the rise in natural gas prices. In winter, when heating demand surges, gas consumption for residential, commercial, and manufacturing uses all increases. These segments account for about 65% of total natural gas demand, further adding to upward pressure on prices, according to analyses.
The potential increase in liquefied natural gas (LNG) exports to Europe is also a factor pushing up natural gas prices. Hong Seong-gi, a researcher at LS Securities, said, "Europe holds relatively less LNG inventory compared to the United States," and noted, "As inventories move from the United States to Europe, U.S. LNG export volumes are increasing, and natural gas prices are rising."
An increase in power demand due to the expansion of data centers is cited as a factor bolstering the medium- to long-term outlook for price gains. In particular, in the United States, as the power burden of artificial intelligence (AI) data centers grows, there are moves to consider expanding the use of natural gas as part of efforts to address power shortages. Since Generative AI consumes about 10 times more electricity than general search, there is analysis that future power demand is highly likely to surge.
Lee Chung-jae, a researcher at Korea Investment & Securities, said, "Discussions related to power consumption should take place after large data centers are built," while adding, "There is a shortage of new energy sources to supply electricity beyond solar and wind, so demand for natural gas will increase through 2030."
However, an increase in data center power usage does not necessarily mean natural gas prices will rise. In the current overall power market, data centers' share is not larger than industrial or residential use, making it difficult to conclude that natural gas prices will rise solely due to the new data center business.
Hwang Byeong-jin, a researcher at NH Investment & Securities, said, "Natural gas prices can be said to have risen excessively due to an influx of short-term speculative funds," and pointed out, "If prices rise, corporations may increase production, which can lead to oversupply."
In addition, ETNs with futures as the underlying asset require bearing roll-over (month-to-month contract switch) costs, so caution is needed. Roll-over refers to the process of selling the near-month contract and buying the far-month contract to continue investing after the underlying asset reaches maturity. If futures prices are rising in the market on expectations of higher natural gas prices, costs arise in the process of buying the far-month contract. This means investors could instead incur losses.