How to trade gas
Discover the benefits of trading natural gas and how to get started
Trading Gas - The basics
When it comes to energy commodities, there is no doubt that oil is the most popular. However, it is far from the only one traders turn to when looking to keep their trading diversified.
Natural gas holds a different flair to oil and is the second most traded energy commodity. Here, we look at the unique characteristics of this fossil fuel, the key reasons it is chosen by traders and how you can take advantage of the opportunities found in this heavily traded market too.
What is natural gas?
Natural gas is usually mistaken to be a by-product of crude oil together with gasoline and heating oil, but it actually isn’t. Natural gas exists alongside oil reserves, but it is not processed from crude oil like gasoline or heating oil.
Natural gas is one of the cleanest energy supplies due to its low carbon dioxide emissions when burnt. The drilling technology used for the production of natural gas has advanced notably in recent years making it a key commodity to cover energy needs in the future.
Since natural gas is found near oil reserves, it also needs to be extracted from the ground. After the extraction process, natural gas is processed into gas and liquid forms in order to make it suitable for transport across countries. To ensure that the extracted natural gas meets the required quality specifications before distribution, it is transported to specialist plants to be examined, treated and stabilized. These extraction and treatment processes are costly and any trouble in the operation of these processes can greatly impact the price.
The uses or purposes of natural gas include heating, electricity generation and cooking using gas stoves. Though the electricity market is the major gas consumer, most of its applications are household-related.
What affects gas prices?
As with any energy commodity, demand and supply are key in determining its price. Here are the factors that impact the supply and demand for natural gas:
1. Extraction and treatment
The extraction and treatment of natural gas are expensive processes. Natural gas occurs alongside oil reserves deep underground, so its extraction process involves a great amount of machine power and energy. Any disruption in the extraction process will impede or delay the production of natural gas and therefore result in decreased gas supply and increased price. The treatment process is an even more expensive operation and any setback in this process will greatly impact the gas supply and its price.
2. Seasonal patterns and weather
Demand for natural gas is also seasonal and weather-related. During cold weather or in the winter season, the demand for natural gas for heating purposes increases and therefore causes increase in prices. During hot weather or in the summer season, natural gas can experience a decrease in demand for heating purposes, but this comes with an increase in demand for electricity generation because of the increased use of air conditioners and coolers.
3. Accidents and disasters
Disastrous events that affect the extraction, treatment, distribution and consumption of natural gas will directly affect the levels of gas supply and demand. Operational disruptions will directly cause delays and reductions in gas supply, thus causing price hikes during the recovery period.
The leading gas consuming nation is the U.S., followed by Russia, China and Iran. These nations import and use the greatest amount of natural gas for heating and power generation. Their demand rates drive the gas pricing, so any sudden change in demand from any of these countries will cause the gas price to fluctuate significantly.
Key natural gas report to follow
The most important report that natural gas traders regularly refer to is the DOE (Department of Energy) Natural Gas Storage Report. It is released weekly on Thursdays and provides a detailed look at the net changes in natural gas storage levels in the Eastern/Mid-Western, South and West regions.
This information will give you insight on the demand and supply levels of natural gas in the market, which are crucial in determining the price.
Historical natural gas prices
To get the whole picture about the price of natural gas, it is useful to look at the price fluctuations in a historical context.
The price of natural gas has been in a decline since late 2008. This is to a great degree due to technological advances that decreased the cost of production.
Gas price chart 1995 - 2015
Although historical prices do not tell the whole story, when it comes to predicting the price of a commodity, they are useful as an indication of the overall trading range.
It is worth noting, that since natural gas has a more predictable supply and demand than oil, its price also tends to be easier to predict, which makes the market popular among trend following traders.
Trading natural gas
Investing in natural gas used to be a complicated process, but traders can now speculate on the price of natural gas online using CFDs to go both long and short.
CFDs (also known as Contracts for Difference) are contracts between a trader and a broker. They are basically tradable instruments that mirror the movement of the underlying asset and let you take positions without having to own any physical commodity.
It is worth mentioning that CFDs allow traders to go short, if they think the price of natural gas will decline, and still benefit from excellent leverage offered by the broker.
Trading example of going short on natural gas
As an example of how this works, let’s suppose that Natural Gas (NGAS) is currently trading at $3.1100. After doing your research, you anticipate demand for the fossil fuel to rise due to the cold season and therefore you expect the price to appreciate.
You buy 5 lots of NGAS, which equals to 500 contracts, at the quoted price. After two days, NGAS is trading at 4.1300 and you decide to close your position and exit the trade. Your profit from the trade is 4.1300 – 3.1100) x 1 lot x 500 contracts = $510.
Now that you know all about natural gas, start trading it live
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Losses can exceed deposits.