What is natural gas?
Natural gas, also known as fossil gas, is a naturally occurring energy source that is formed deep beneath the earth's surface. It contains many different components, however, the largest constituent is methane. Colourless and odourless in its natural state, natural gas is the cleanest burning fossil fuel available today: when it’s burned, it produces mostly carbon dioxide, water vapour and minor amounts of nitrogen oxides.
The formation of natural gas began millions of years ago. The remains of dead plants and animals decayed, forming thick layers of organic material mixed with silt and sand. Over time, more deposits of rock and sand covered this substance and buried it deep beneath the ground. Heat and pressure then transformed this organic matter into the fossil fuels we use today. Some of it evolved into petroleum, some transformed into coal and some evolved into natural gas.
Just like other forms of heat energy, natural gas is measured in British thermal units (Btu). Accessible and abundant resources, technological developments and the world's extensive delivery infrastructure have created a fundamental shift in the natural gas marketplace, providing an opportunity to satisfy significantly growing demand at rather affordable prices.
The largest countries worldwide are involved in the extraction and processing of hundreds of billions of cubic meters of natural gas yearly.
What makes it so valuable?
The popularity of natural gas has been maintained by its increased use in rapidly developing countries, such as Indonesia and China. As the global community looks to diversify its energy mix, the importance of natural gas is continuously growing. While it is not as clean as wind or solar energy, it remains the cleanest fossil fuel energy source available today. It produces about half less than oil and a third less carbon dioxide than coal when burned. It also emits little to no sulfur, making it more eco-friendly and efficient than others.
What are the applications of this commodity? In fact, you might find it surrounding you daily: it fuels your vehicle, heats your house, dries your laundry, operates refrigeration and cooling equipment, cooks food and provides outdoor lighting.
Natural gas plays a crucial role in producing electricity and serves as a source of fuel for homes, industries and governments.
What drives the price of natural gas?
As a matter of fact, the sources of natural gas are limited, and it takes time to find, develop, explore and drill new ones. In recent years, prices for natural gas have been strongly correlated with its production: when production increases, consumer prices fall, while declines in production results in higher prices.
However, that is not the only aspect that has an impact on the natural gas price. The following factors can lead to the largest price swings:
- Economic growth. Increased economic growth, especially in the industrial sector, tends to push up the price of natural gas as demand rises for consumables and services provided.
- Weather. Abnormal or extreme weather can have a big impact on the prices of natural gas, pushing and pulling on the supply and demand forces. Typically, unforeseen changes in weather can have the biggest effect, especially when natural gas is in shortage and pipelines are transporting at full capacity.
- Supply. The supply of natural gas in storage affects the price, depending on whether there is a deficit or surplus. If there is a surplus, then prices are likely to go down due to an abundant supply, and vice versa.
- Substitutes. Alternative products, especially more eco-friendly sources of energy, such as wind, solar and hydroelectric power, also affect natural gas prices. With an increased focus on “going green”, these environmentally friendly substitutes may become strong competitors of natural gas in the future. Additionally, some large fuel consumers, like electric power plants, can substitute between natural gas, petroleum and coal, depending on the price of each.
What are the advantages of adding natural gas to your portfolio?
First of all, as it is priced in US dollars, natural gas investing can be a way to bet on a weak currency performance and higher inflation. Once the US dollar shows some inflation concerns, the price of the commodity might benefit from fears due to its limited supply.
Another great reason to invest in natural gas is diversification. If you are looking for a way to hedge the risks, then you should consider adding a portion of commodities, such as natural gas, oil and metals, to your investments list. Investing in commodities is one of the ways to create a winning portfolio.
What do the experts say about natural gas?
Global demand for natural gas has largely been on the rise for the last decade. According to the International Energy Agency, it is expected that in the next five years demand for natural gas will rise by around 1.6% a year, with the majority of this growth coming from emerging Asian markets.
Today, many energy companies see natural gas as a key driver of future growth. Patrick Pouyanne, the CEO of Total SAA, one of the world’s largest energy companies, describes natural gas as “the fossil fuel of the future”, saying that in 35 years Total will produce and distribute more gas than oil.
More than half of Shell’s production is attributable to natural gas. The commodity is also a growing segment of Chevron’s energy portfolio, and the group says it has “the capabilities required to develop resources and deliver natural gas to markets where its use is growing.”
BP, a British multinational oil and gas company, plans on lower-for-longer oil prices and shift towards gas in its portfolio as part of its business strategy. Meanwhile, ExxonMobil, an American multinational oil and gas corporation, believes natural gas is “a major game changer with fewer emissions, flexibility and abundance.”
So, should you trade natural gas in 2019?
Like any other commodity, natural gas prices may be highly volatile. These price swings attract many day traders from all around the world since the spread is rather reasonable, offering high liquidity and making it easy for traders to get in and out of trades. Exposure to natural gas is not only accessible through the commodity itself, but also through a plethora of exchange-traded funds (ETFs) and contracts for difference (CFDs).
However, when trading natural gas, you should also consider the risks:
Higher natural gas prices or lower costs for other green energy resources could lead consumers to substitute consumption;
Global political or economic uncertainty could strengthen the US dollar and weaken demand for commodities;
A global recession could weaken energy demand.
How to start trading natural gas in 2019
If you are wondering how to trade natural gas, there are actually several ways you can get your hands on the commodity. You can invest in natural gas exchange-traded funds (ETFs) or trade stocks that have a vested interest in the related industry, such as Gazprom, BP or Royal Dutch Shell.
However, one of the easiest ways to start trading natural gas is through contracts for difference (CFDs). CFD allows you to go short or long on the asset without ever taking ownership of it. Therefore, you simply speculate on its price direction in order to profit from the price difference: if you think the price will rise, you ‘Buy’; if you think the price will fall, you ‘Sell’.
A contract for difference provides easier execution and greater liquidity, as well as allows trading on margin, offering bigger exposure to the chosen markets. However, as CFDs are a leveraged product, gains, as well as losses, are magnified.
You can learn more about CFD trading with free online courses provided by Capital.com.
Natural gas trading strategies
Trading natural gas involves similar strategies used to trade other commodities, such as gold, orange juice or crude oil. Capital.com offers a comprehensive guide to natural gas trading, as well as provides various trading strategies examples.