NatGas surge weighs heavily in commodity indices NatGas surge weighs heavily in commodity indices NatGas surge weighs heavily in commodity indices

NatGas surge weighs heavily in commodity indices

Ole Hansen

Head of Commodity Strategy

Summary:  US Henry Hub Natural gas has following a 160% year-to-date surge become the biggest component in the Bloomberg Commodity Index, and it highlights just how extreme market moves and developments have been during the past year across the commodity sector. In this we look at what it means and what investors in commodity tracking funds should be aware of


US Henry Hub Natural gas (ticker: NG) has following a 160% year-to-date surge become the biggest component in the Bloomberg Commodity Index (BCOM), the first time this has occurred in the index’ +30 year history, and it highlights just how extreme market moves and developments have been during the past year across the commodity sector.

The BCOM index which together with the S&P GSCI and DBIQ Optimum Yield Diversified Commodity Index belongs to the heavy weights within the global investment industry, tracks the performance of 23 major commodity futures targeting a one-third exposure in the main sectors of energy, metals and agriculture. The target weights are set once a year every January and if prices shift significantly during the year, a reweighting will not occur until the following January.

The mentioned 160% year-to-date surge in US natural gas futures has more than doubled its weight to 17.2% from 8%, and in the process made it the biggest component in the BCOM index, more than double that of WTI and Brent combined. From a sector perspective, and given strong gains across the other energy components, especially fuel-based products, it has lifted the total energy exposure by 9.2% to 40.9%. All other sectors and sub-sectors share the reduction with the biggest seen in metals with industrial and precious down by a combined 7.5%.

What it means?
The BCOM index is likely to become more volatile with its performance increasingly dependent on developments within the energy sector, especially natural gas. Recently the price hit $10 per MMBtu before suffering a 10% setback due to a further delay of the restart of the Freeport LNG export plant which has been closed for months following an explosion. The expected restart will increase demand for US gas and with that slow the process of adding stockpiles before the winter extraction season starts in a couple of months’ time.

The biggest threat to the energy sectors strong performance is the combination of a deep recession eroding demand and a peaceful solution to the war in Ukraine sending EU gas prices sharply lower in anticipation of flows from Russia normalizing.

What should investors in commodity tracking ETF’s do?
The short answer is nothing as the reasons for investing in tangible assets such as commodities has not changed. The other commodity tracking funds mentioned earlier, and which also include the CRB Index will all be affected depending on their individual exposure to natural gas. Overall, the BCOM has from the outset the largest exposure and is therefore the index impacted the most. From an investor perspective these types of futures tracking commodity funds remains a cheap solution to gain exposure to commodities. With natural gas being notoriously volatile some increased price swings on the index can be expected, and if the strong gains are being maintained we should expect a very active rebalancing next January where gainers will be sold, and losers bought in order to reset the target weights.

Source: Bloomberg, Saxo Group
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.