Some of the best performing ETFs over the past month could see their short-term fortunes reversed after National Grid, the company responsible for delivery of gas around the UK, warned on 1 March that industrial users of energy may have to shut down as gas supplies have been decimated by late winter weather.
National Grid’s warning came after the so-called “Beast from the East” winter storm looked set to be followed by “Emma”, causing further record cold temperatures to be matched by snow-fronted weather across most of the UK. Residential customers have been turning up their heating in response to the freezing temperatures. However, the UK’s storage facilities have been significantly curtailed in recent years, meaning that excess stores of natural gas may not be enough to avoid gas suppliers from telling business customers that they will see their supplies cut off.
A warning note sent out early on 1 March to suppliers warned: “National Grid has issued Gas Deficit Warning for Gas Day 01/03/2018. Please see Prevailing View for the latest Supply/Demand position. This warning has been issued in response to a series of significant supply losses resulting in a forecast end of day supply deficit.”
Last year, Centrica, owner of British Gas, sought regulatory approval to close down the Rough storage site, the UK’s biggest gas storage facility. However, there have also been ongoing issues with other supply sources, such as pipelines from the Netherlands and Norway. Regulations mean that National Grid must maintain, for example, minimum pressures in its network, and that there are protocols for turning off supplies to certain heavy users should storage levels start to fall to certain levels.
Wednesday 28 February saw demand hit a six-year high for gas use in the UK, with spot prices soaring.
Authorities responsible for monitoring the UK’s weather issued another, extremely rare, “Red” warning on 1 March, mainly focused on the Southwest and parts of Wales. This followed a similar warning issued for 28 February affecting parts of Scotland. Health authorities have been urging residential users to maintain heating at a minimum 18 Centigrade in their homes.
ETFs betting against gas prices have otherwise had a good past month of performance, data from FE suggests, reflecting demand levels more broadly at a global level as well as forward prices.
|VelocityShares 3x Inverse Natural Gas ETN in EU||63.78||11.49||14.74||-16.96||-25.71||-64.01|
|ETFS 3x Daily Short Natural Gas in EU||60.04||21.46||29.86||-4.24|
|Boost Natural Gas 3x Short Daily ETP in EU||53.06||8.74||15.72||-12.25||2.68||-51.12|
|Boost Natural Gas 2x Short Daily ETP in EU||34.66||8.91||16.51||-2.40||55.38|
|ProShares UltraShort Oil & Gas TR in EU||28.13||-8.26||-23.65||-15.35||-28.31||-38.36||-91.41|
|ETFS 1x Daily Short Natural Gas in EU||19.30||8.60||13.96||-0.64||40.57||74.16|
|ETFS 1x Daily Short Natural Gas USD in EU||19.27||8.56||13.95||-0.66||40.52||74.10||1185.01|
|ProShares Short Oil & Gas TR in EU||14.49||-5.19||-13.14||-13.57||-13.96||-11.79|
Source: FE, data to 23 February, rebased in euros
With the spike in short-term prices driven by cold weather across the UK and more broadly Europe, there is an expected impact on investments betting on the price going down rather than up.
However, for exchange traded funds the impact will depend on which index is being used. For example, the VelocityShares 3x Inverse Natural Gas ETN fund uses the S&P GSCI Natural Gas index, which has returned -18.3% over the past 12 months. The next two best performing funds on the basis of performance over one month respectively use indices from Bloomberg and Nasdaq.
Beyond ETFs, should the UK actually move towards an enforced shutdown of the biggest users of gas, such as factories and electricity power generation, then there could be further impact on long only mutual funds – whether in the form of unit trusts or Ucits vehicles – that invest in UK companies with exposure to the UK economy.