Long MLP ETF & Short Micro Nat Gas Futures on Shifting SeasonaliHenry Hub Natural Gas (US LNG) prices have surged 46.2% since November 2024, driven by colder weather forecasts, rising European gas prices, increased feed gas to U.S. LNG facilities, and expectations of stronger domestic and European demand.
US LNG prices typically climb in winter as U.S. heating needs spike, with the December-March period marking a net drawdown in storage. However, the recent rally has been volatile. Shifting weather forecasts triggered fluctuations, including a sharp 7.6% one-day drop on 27/Nov.
Source: CME CVOL
Turbulent fundamentals, choppy weather, and uncertain geopolitics have forced implied volatilities on US LNG to spike to levels of 99.47 on 20/Dec, unseen over the last 12 months.
Supply concerns in Europe have further supported the uptrend. In reducing reliance on Russia, EU’s demand for US LNG has intensified, which accounted for 48% of the imports in H1 2024.
US LNG exports increased to 14 bcfd in December, up from 13.6 bcfd in November, reflecting strong activity. For 2024, US LNG shipments are projected to reach 86.9 million metric tons, about 720,000 tons (0.8%) higher than in 2023, reports Reuters .
Trump’s re-election has fired up optimism of accelerated LNG project approvals, increased drilling, & relaxed pipeline regulations, potentially boosting US LNG exports.
DATA CENTRES TO DRIVE ELECTRICITY CONSUMPTION GROWTH
The growing adoption of AI-driven technologies and the expansion of data centres are significantly increasing electricity demand, placing utilities at the forefront of powering the tech industry's rapid evolution.
Source: IBISWorld
Deloitte projects U.S. data centre electricity demand to rise sharply reaching 515–720 terawatt-hours (TWh) by 2030 (up from 180–290 TWh in 2024; CAGR of 17%).
Tech giants are turning to renewables and nuclear energy to meet rising energy needs. However, challenges with wind and solar intermittency, alongside the delayed rollout of modular nuclear reactors, make natural gas indispensable.
Source: EIA STEO
US LNG remains dominant, generating 43% of U.S. electricity. It is solidifying its role as the backbone of tech energy needs.
MIDSTREAM GAS COMPANIES PRIMED TO BENEFIT FROM TRUMP’S SECOND TERM
Trump’s support for US oil & gas is expected to push production up. LNG exports surged under his administration, rising from 186.8 Bcf in 2016 to 2,390 Bcf in 2020.
Source: EIA
While increased supply could exert downward pressure on US LNG prices, particularly as winter demand wanes, lower gas prices benefit utilities by improving cost efficiency.
Additionally, rising electricity demand supports pipeline, LNG infrastructure, & midstream gas companies, which are less exposed to price fluctuations than drillers. Performance of midstream energy stocks is a function of production volumes & pipeline capacity rather than energy prices.
Record U.S. oil production has kept pipeline utilization rates high, supporting midstream revenues. However, infrastructure deficits in key regions have created transportation bottlenecks, leading to backlogs.
The completion of new pipelines, storage units, processing facilities, and export terminals will ease these supply constraints. A Trump presidency could expedite the approval of LNG transport infrastructure.
LNG exports remain a key growth driver as new terminals and processing plants come online. Even if US LNG prices fall to USD 2/MMBtu, producers will remain profitable due to higher global LNG pricing.
The US is the largest LNG exporter and is set for further growth. The EIA projects LNG exports to rise by 15% to nearly 14 Bcfd in 2025, driven by increased capacity.
MLP ETFs CAPTURE US ENERGY OUTPUT GROWTH WITH REDUCED EXPOSURE TO PRICES
To capitalize on the expected growth in natural gas production, exports, and supply infrastructure, there are many alternatives. Investing into listed Master Limited Partnership (MLP) is one among them.
An MLP is a publicly traded entity that combines the tax benefits of a partnership with the liquidity of listed stocks. MLPs manage midstream infrastructure like pipelines, storage, & processing facilities for transporting and processing oil & gas.
The main drawback of MLPs is their complex tax form, potentially leading to higher taxes upon investment exit. To address this, an MLP ETF, which invests in a diversified group of MLPs focused on energy infrastructure, offers convenience of trading, diversification, high dividend yields, and simplified tax reporting.
The low correlation to underlying energy prices has made MLP ETFs increasingly attractive to investors over the past year. These ETFs are the only one in energy segment to attract inflows in 2024, while broader energy and other subsectors faced outflows, according to ETFTrends.com .
The largest MLP ETF in the U.S., the Alerian MLP ETF ( AMEX:AMLP ) recorded USD 1.30 billion in net inflows over the past year, while the Energy Select Sector SPDR ETF (XLE) and Vanguard Energy ETF (VDE) saw outflows of USD 3.24 billion and 745.2 million, respectively.
Since 2015, on average, AMEX:AMLP has gained 2.7% in January, while $Henry Hub has increased by 6.8%.
Additionally, the ETF has exhibited a lower standard deviation, indicating less volatility.
AMEX:AMLP tracks the Alerian MLP Infrastructure Index ( LSE:AMZI ), which comprises North American-based energy infrastructure MLPs generating most of their cash flow from fee-based midstream activities. With an AUM of USD 9.6 billion, AMEX:AMLP is the second-largest energy ETF. The ETF has a yield of 7.87% and an expense ratio of 0.85%.
The ETF’s largest holdings are major MLPs, such as ENERGY Transfer, NYSE:MPLX , and ENERGY Products Partners, among others.
HYPOTHETICAL TRADE SETUP
The AMEX:AMLP gained significant investor attention post-Trump’s re-election, with net inflows of USD 518.2 million from 06/Nov to 20/Dec, including USD 152 million on 06/Nov—the highest in the past year.
Its appeal lies in a healthy yield, low sensitivity to interest rates, and a fee-based model that stabilizes cash flows, making it less volatile than other energy subsectors.
Looking ahead, MLP yields are expected to remain attractive as interest rates decline.
However, since the start of December, AMEX:AMLP fell sharply while the $Henry Hub gained 17%.
This correction in the AMEX:AMLP prices offers a compelling entry-level, given the favourable macroeconomic conditions and positive seasonality going into January. Bullish drivers aside, risks to the downside exist from policy shifts and weather linked price volatility.
Portfolio managers who wish to invest into AMEX:AMLP ETF could consider hedging the downside risk using CME Micro Natural Gas Futures. Each lot of Micro Natural Gas Futures represents 1,000 MMBtu.
CME Micro Natural Gas Futures contract expiring in February 2025 (MNGG2025) settled at 3.412/MMBtu last Friday. On that basis, each lot of MNGG2025 represents a notional value of USD 3,412. For the spread trade to be effective, a portfolio manager will require 72 shares of AMLP ETF to hedge against one lot of CME Micro Natural Gas Futures.
This paper posits a hypothetical trade setup consisting of long 72 shares of AMEX:AMLP and short 1x CME Micro Henry Hub Natural Gas February Futures Contract (expiring on 01/Feb).
An entry at 13.9 coupled with a target at 16.1 and stop-loss at 12.6 delivers a 1.27x-1.62x in reward-to-risk ratio.
MARKET DATA
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