Natural gas is one of the most popular commodities among traders along with oil. Thanks to its high volatility, it is traded by both intraday and long-term investors .
In this guide, you will discover the importance of natural gas for the modern economy, study the major factors forming its price and the most popular trading instruments and strategies.
Ways to Trade Natural Gas
Natural gas is a fossil fuel that is formed from dead plant matter deep in the ground. It is one of the most highly demanded commodities and is especially popular among day traders because this commodity is not handled after expiry.
Natural gas is traded in the form of contracts, futures, options or derivatives (CFDs). Like any other commodity, it is prone to price fluctuations, so traders should perform fundamental analysis and study the market closely in order to make reliable predictions.
Since investment in gas is a challenging task, traders should be aware of supply and demand, geopolitical situations and other processes for making informed decisions.
Type of Investment
Natural Gas Futures
Day trading is one of the most widespread variants because it allows speculating on short-term price fluctuations. There’s no need to handle gas and care about transportation - trading takes place online, and all profits and losses are reflected in the trader’s account.
Natural gas futures contract is a simple way of trading within a day. This is an agreement to buy or sell something (like a commodity, for example) on a certain date. Day traders close their contracts (deals) during the day and can speculate on buy/sell price differences.
Gas futures contracts are available on the Chicago Mercantile Exchange (CME): there are many contracts because several types of natural gas exist. NG (the Henry Hub natural gas futures) are the most popular choice. Each contract stands for a certain volume of gas, to be more precise - 10,000 million British thermal units (mmBtu).
Natural Gas Options
Along with futures, CME also offers an options contract on gas futures. This instrument is designed to trade on price differences with or without leverage. Options also come with a strike price (the level above which the option ends in money).
Options buyers pay a premium for purchasing contracts. This bet will succeed only if the gas futures price rises above the strike price by an amount higher than the premium paid. Hence, traders should correctly guess the volume and timeline of the price move in order to make a profit.
Natural Gas ETFs
You can also invest in ETFs representing the sector. The ETF that trades North American natural gas is the United States Natural Gas Fund (UNG). Other ETFs associated with this market include:
ProShares UltraShort Bloomberg Natural Gas (KOLD).
ProShares Ultra Bloomberg Natural Gas (BOIL).
United States 12 Month Natural Gas Fund (UNL).
An exchange traded fund is an investment product that replicates the performance of an existing security or group of securities. The fund uses the physical purchase of assets that it tracks or more sophisticated investment methods to replicate movements in the underlying market.
Since they perform a similar function to indices, mutual funds, and other exchange-traded products, an ETF can be used to access a wide selection of assets. You can gain exposure to an index, shares of a specific country, a commodity, a currency or fixed-rate instrument markets via an ETF.
If you use ETFs for intraday trading, beware of risky leverage. If you want to go long on this market, you can use a bullish options strategy such as the bull put spread. If you want to go short, you can use a bearish strategy such as the bear call spread.
Natural Gas Stocks
There is a wide range of publicly traded companies that are related to natural gas and offer stocks. By purchasing their shares on a spot market and getting leverage, you can diversify your portfolio and gain exposure to a wide range of commodities, including oil. However, leverage magnifies both potential profits and losses.
Besides, these shares are prone to price fluctuations because of many other factors, such as local demand for the products, production expenses and interest rates. It goes without mentioning the company’s internal factors, such as management, and external factors, such as overall market performance.
When it comes to shares of companies that produce or exploit natural gas, you can consider the ones of BHP Group Ltd (BHP). Antero Resources Corp (AR) and Phillips 66 (PSX) securities also trade on the New York Stock Exchange.
Natural Gas CFDs
CFDs are derivative products that allow you to trade on the price performance of an underlying ETF without ever owning any units. Derivatives simply follow the price of the asset on which they are based.
With CFDs, you can go long or short depending on whether you think the price of the asset will go up or down. If you think the price of a market will rise, you will go long; if you think it will go down, you would go short instead.
Please, note that the contract sizes are usually smaller than of traditional future contracts. For instance, a natural gas CFD may be for 500 mmBtu, while the standard size is 10,000 mmBtu. Thus, CFDs may be a nice variant to study and explore the gas market.
Advantages and disadvantages of natural gas trading
Before you register on an exchange and buy your first shares or contracts, make sure you are aware of gas trading peculiarities.
Natural gas is considered to be more environmentally friendly than coal and petroleum. Hence, the demand for this clear fuel drives price growth.
Investing in natural gas is a nice hedging instrument during a weak US dollar and inflation. The cost of this commodity typically rises when people get afraid of inflation.
Natural gas allows for portfolio diversification because there’s a decent range of tools available and a high liquidity.
Geopolitical factors, such as news, events and laws, pose a high risk to gas prices.
With the rising difficulty of gas extraction, the supply and demand may be affected. Operational expenses have a serious impact on gas cost.
Natural gas trading strategies
You can exercise several trading approaches to figure out what works best for you. Note that natural gas is rather recommended for day trading, which requires attention and analytical skills.
Day trading strategy
Thanks to a high volatility of natural gas, day trading is one of the most popular ways of investing. Traders potentially earn from several deals but they need to scan the market in search of favourable trading positions throughout a single session.
This strategy is recommended only if you have enough time to monitor the market during the day and know how to find news and events that could impact the price of the commodity.
Range trading strategy
This is a similar strategy but the timeline can be much longer than a day. Range traders find price trends and seek to buy at support levels to sell at resistance levels. This approach works better on volatile markets when there is a short- or mid-term trend. That makes it a perfect choice for natural gas trading if users know how to define support and resistance levels.
Breakout trading strategy
This is another strategy that’s based on price fluctuations. In this case, traders find a price increase at the early stage of a trend. It allows them to buy low and sell high when the commodity’s historical price breaks the level of resistance and sets new records.
Alternatively, breakout strategy users can short when the asset’s cost goes below the historical level of support. Hence, this approach works in both directions and can prove useful in upward and downward trends.
How to trade natural gas using technical analysis?
Traders analyze the natural gas market using various instruments:
Natural gas is a commodity that tends to follow certain cycles - mostly because of weather changes. Typically, prices are higher in winter when people use more gas for heating their homes, and lower in summer, when the volume of gas consumption is lower. Hence, traders anticipate winter months for making speculations possible.
With such an approach, swing trading becomes an easily exercised approach. Investors reveal trends by applying indicators and use limits, stop-losses and positive risk-reward ratios for reinforcing their strategies.
Beginners usually work with trend lines, chart patterns and support/resistance zones. Here’s how you can benefit from analytical tools:
Trend lines help identify the current movement of gas price: you will see consecutive higher highs (for uptrend) or lower lows (for downtrend). Trend lines can also show support and resistance levels.
RSI indicators display oversold/overbought levels and allow users to understand divergence, as well.
Divergence serves to show a possible trend reversal. For example, when the market is bearish, the RSI will show higher lows while the instrument indicates lower lows. This sort of divergence between price and indicator could signify asset price reversal.
Seasoned traders use more sophisticated techniques, including Ichimoku, Fibonacci retracement and Wave Theory. After analyzing natural gas prices, a trader can perform technical analysis to figure out the right entry into the market.
Coupled with skilful risk management, such techniques can be efficient for both beginners and advanced traders. The abovementioned indicators and approaches provide more than the full insight into the natural gas market.
Natural gas trading hours
Here are schedules of gas markets:
5.00 PM - 4.00 AM Sunday-Friday (Central Time)
6.00 PM - 5.00 AM Sunday-Friday (Eastern Time)
11.00 PM - 10.00 AM Sunday-Friday (UK Time)
What is natural gas?
Natural gas is a gaseous colorless mixture of hydrocarbons. Methane is the main ingredient in its composition, but this mixture also includes carbon dioxide, hydrogen sulfide or helium. Natural gas is mainly used for the production of electricity and heat. For this reason, natural gas consumption tends to be high in the winter - this is when heating needs are greatest.
Natural gas is also used to meet air conditioning needs. Energy consumption can therefore also register significant increases in summer, during very hot weather. Global warming should even see this trend increase.
Finally, natural gas can be compressed and liquefied, which is particularly popular with exporting countries. It allows them to sell their resources to importing countries.
Which countries are the biggest producers of natural gas?
According to British Petroleum, the following countries are biggest natural gas producers (numbers show billion cubic metres):
What factors affect the price of natural gas?
The evolution of the price of natural gas depends on the confrontation of supply and demand. This is what creates the big long-term trend moves. A drop in demand or an increase in supply pulls natural gas prices down, and vice versa. Here are the factors influencing it:
Cost of oil. Oil and natural gas are two fossil fuels in direct competition for the production of electricity. When the price of oil goes up, the price of natural gas also goes up. There is a very strong positive correlation between the two. The evolution of prices varies according to the level of demand for electricity in the world.
Energy transition. Natural gas has experienced a particular growth since the Paris climate agreement (COP21). It makes it possible to ensure the energy transition necessary to preserve the planet and there are abundant reserves of natural gas, particularly in Africa. Many countries are moving towards this fossil fuel, particularly in the industrial sector.
Policy of The United States and Russia. These are the two main natural gas producing regions, far ahead of the other countries. Their level of production should be closely monitored.
The industrial sector. It is a major consumer of natural gas and the level of demand depends on the economic situation. Economic cycles (growth, recession, recovery, expansion) have a strong impact on the level of global demand.
US Dollar. Natural Gas is quoted in US Dollars. There is a negative correlation between the dollar and natural gas. If the dollar falls, the price of natural gas rises and vice versa.
Natural gas is one of the most highly-demanded commodities, so it’s not surprising that it’s appealing to traders because of its price fluctuations. There is a large gamut of gas-related assets (futures, ETFs, CFDs and shares) and analytical instruments enabling speculation. With the right strategies and proper market analysis, natural gas becomes a suitable choice for intraday trading.
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