How To Trade Natural Gas?

A futures contract, such as the CME’s Henry Hub natural gas futures contract, is the most frequent mechanism for traders to take a position on natural gas. With a futures contract, traders agree to supply a specific amount of natural gas at a predetermined price at a future date. This does, however, imply that the trader may have to accept delivery of the asset at some point.

Is it possible to exchange gas?

Natural gas can be traded in a few different ways. Futures, options, and stocks and ETFs are the most popular.

When you trade natural gas with us, you’ll be speculating on the market price of futures, stocks, and ETFs utilizing derivatives. Instead of taking ownership of the underlying asset, you’ll be betting on whether the market price will climb or fall. The extent to which the market moves in your favor or against you will determine your profit or loss.

Do you want to buy or sell natural gas? Open an account right now, or try a risk-free demo first.

Natural gas futures

Natural gas futures are agreements between two parties to exchange a specific amount of natural gas at a specific price on a specific date in the future. The trader would either obtain physical delivery of natural gas or settle their position in cash at the date of expiry.

They would be able to buy natural gas at a lesser price if prices rose above the agreed-upon level, but they would have to pay a higher price if prices decreased. The idea is that businesses and investors may lock in a price ahead of time, thereby hedging against market fluctuations that could hurt them.

The Henry Hub in Louisiana, where various US pipelines meet, is where natural gas futures are based on delivery. The natural gas contracts are valued 10,000 million British thermal units (MMBtu). Most other derivatives are based on natural gas futures.

Natural gas options

Natural gas options, like futures, allow traders to buy or sell natural gas at a predetermined price on a predetermined expiration date. Options holders, unlike futures investors, can choose whether or not to execute their contract when it expires.

Calls and puts are the two forms of contracts. If you felt the price of natural gas would climb, you’d buy a call option, and if you thought it would fall, you’d buy a put option. If the price of natural gas rises over the strike price, the option is in the money and can be exercised at a profit.

Natural gas stocks

Natural gas stocks are shares in firms that operate in the sector. Natural gas transportation necessitates the use of a pipeline, hence infrastructure businesses are among the most popular natural gas stocks. Exporters and producers are two other major stakeholders.

BHP Billiton, Antero Resource Corp, and Enterprise Products Partners are examples of well-known natural gas stocks. It’s worth mentioning that many ‘natural gas stocks’ will likely expose you to other energy sources as well, such as crude oil. This necessitates a thorough understanding of each company’s operations and the elements that will influence its stock price.

Natural gas ETFs

Natural gas exchange-traded funds (ETFs) are financial vehicles that allow traders to gain exposure to a diversified portfolio of assets from a single position. ETFs that contain natural gas futures or shares of companies involved in the industry are available to trade.

  • WisdomTree Natural Gas 2x Daily Leveraged is a hedge fund that tracks the Bloomberg Natural Gas SL index to replicate 200 percent of daily changes in natural gas futures contracts.
  • iShares STOXX Europe 600 Oil & Gas (DE), which invests in physical index assets to closely match the performance of the STOXX Europe 600 Oil & Gas Index.
  • The SPDR S&P Oil & Gas Exploration & Production ETF attempts to match the total return performance of the S&P Oil & Gas Exploration & Production Select Industry Index.

Which indicator is ideal for trading natural gas?

For natural gas traders, technical analysis has long been a useful tool. Technical analysis, which uses previous price data to estimate commodity price direction, contrasts from fundamental analysis, which looks at the impact of relevant economic and financial factors like weather and gas inventories on prices. If fundamental analysis aids traders in forming initial expectations about likely price changes over specific time periods, technical analysis aids them in determining the best time to make judgments. Moving averages, MACDs, and RSIs are three of ZEMA’s technical indicators that are particularly valuable for natural gas traders.

A simple moving average can be extremely beneficial. A moving average, as a trend-following indicator, smooths historical prices and eliminates random swings. Simple moving averages (SMAs) and exponential moving averages (EMAs) are the two most common varieties (EMAs). While SMAs are better at detecting support and resistance levels, EMAs are more sensitive to price swings and are typically employed to track the direction of a trend.

Both of these formulas are included in ZEMA and can be used to create simple and straightforward trend representations. A fast 1-week EMA (orange line) and a slow 5-week EMA (green line) were created using historical spot data regarding Henry Hub natural gas prices in the graph below. The fast line crossing over the slow line at the start of the year obviously suggests a “bullish market trend,” whereas the slow line crossing over the fast line at the end of June definitely signals a “downtrend trend,” resulting in a continued widening.

Figure 1: Moving Average Analysis of Historical Henry Hub Natural Gas Prices (NYMEX), January 2014August 2014.

A moving average convergence/divergence is another helpful technical indicator from the moving average family (MACD). MACDs are used to detect changes in a price trend’s direction, momentum, and duration. MACDs are momentum oscillators that are constructed by subtracting a longer EMA from a shorter EMA (most common are a 26-day EMA and a 12-day EMA). ZEMA can draw two lines: an actual MACD and a signal line, which is an exponential moving average of a MACD line (usually it is a 9-day EMA).

The logic behind MACD analysis is quite similar to that of EMA analysis: a negative signal occurs when a MACD line falls below a signal line, and a bullish signal occurs when a signal line crosses above a MACD line.

These two lines have been added to the preceding example in the diagram below (the MACD line is grey and the signal line is red).

The MACD indicator is now more trend-sensitive and can detect changes in slope more quickly. It was able to detect the trend reversal at the end of March and the start of April faster and more precisely than EMA lines.

Figure 2: MACD Analysis of Historical Henry Hub Natural Gas Prices (NYMEX), January-August 2014.

The relative strength index (RSI) is a momentum indicator that is often employed in technical analysis. It fluctuates between 0 and 100, indicating the relationship between average gain and average loss based on current trading session closing prices. For the trading period, an usual figure is 14. The primary goal of this indicator is to identify whether an asset is overbought or oversold. Natural gas will be considered overbought (overvalued) if the RSI exceeds 70 or oversold if the RSI falls below 30 in this situation.

Both RSI and standard RSI formulas are available from ZEMA. The standard RSI is calculated on a cumulative basis, which smooths out the line and eliminates misleading signals. Except for the one in the middle of July, which implies that the natural gas price has reached its lowest point and is ready to recover, the normal RSI (black line) shows no apparent “overbought” or “oversold” positions. Because big price jumps and declines might cause erroneous alerts, RSI is rarely utilized alone. It’s best used as a supplement to a moving average analysis.

Figure 3: RSI Analysis of Historical Henry Hub Natural Gas Prices (NYMEX), January-August 2014.

Despite the fact that natural gas analysis is a complex operation that necessitates traders’ in-depth market expertise, ZEMA unquestionably reduces this effort technically. Schedule a free demo to learn more about ZEMA.

How do I purchase natural gas futures?

At 10,000 million British thermal units, the Henry Hub Natural Gas futures contract (NG) on the New York Mercantile Exchange (NYMEX) is commonly regarded as a national benchmark price (mmBtu). The pricing is based on delivery at the Henry Hub in Louisiana, which serves as a crossroads for 16 interstate natural gas pipeline networks that transport gas from the region’s abundant reserves. The pipelines connect markets on the East Coast, Gulf Coast, Midwest, and up to the Canadian border in the United States. Natural gas futures and options contracts can be used by a wide range of companies, from those active in natural gas exploration and production to large energy consumers, to hedge their price risk.

Individual investors can engage in an important energy market and trade futures contracts nearly 24 hours a day, six days a week, thanks to natural gas futures and options. Natural gas futures are subject to unpredictable price movements, which can draw speculators looking to profit from significant price changes, but also exposes them to large losses.

What are the methods for buying and selling natural gas?

If you live in a deregulated state, you have the option of choosing your energy supplier, which includes natural gas. But how does this take place? What is the process for providers to sell natural gas, and what elements influence the outcome?

Natural gas can be bought, sold, and exchanged on the free market, just like electricity and other commodities. Energy suppliers in deregulated jurisdictions keep a close eye on energy prices and buy natural gas for consumers at current market prices. This allows them to sell natural gas at a guaranteed, often lower price than the utility.

Natural gas prices tend to be lower in March and April, according to the New York Mercantile Exchange (NYMEX), making spring an ideal time to consider enrolling in a natural gas plan with a secure and locked-in rate. Here you may look for price plans in your neighborhood.

Natural gas retail prices differ from state to state and city to city. The following factors have the most impact on those differences:

  • Natural gas must travel a long distance.
  • Transmission pipeline capacity and availability
  • Customer demand volume
  • Distribution costs, taxes, and other fees
  • State laws and regulations
  • Number of competing providers and their availability

Naturally, supply and demand influence the price of all commodities, including natural gas. Lower prices are usually the result of an increase in supply and/or decrease in demand, whilst higher prices are usually the consequence of a drop in supply and/or increase in demand.

In the same way, higher prices, which are less appealing than lower rates, will restrict demand while encouraging output. Lower prices will discourage manufacturing, reducing the risk of an overflow of supply and maintaining a more balanced supply-demand ratio.

Supply and demand are influenced by the following factors:

We all know that supply and demand have a direct impact on natural gas prices. But what influences supply and demand? Let’s have a look at some examples:

  • Factors that influence supply
  • Ability and speed of production
  • Too much natural gas produced too rapidly, or not enough produced at a fast enough rate, will have an influence on available supplies.
  • Storage capacity of natural gas
  • During periods of low demand, natural gas can be stored; however, if there is not enough or too much natural gas in storage compared to the speed and ability to create natural gas, the supply may be too great or insufficient.
  • Imports and exports of natural gas
  • The amount of natural gas going out or coming in has an impact on supply.
  • Demand Influencing Factors
  • The state of the economy’s expansion
  • When the economy is doing well, demand for commercial and industrial goods and services rises, which means natural gas demand rises as well.
  • Weather extremes are unpredictable. An exceptionally warm winter or cool summer reduces demand for natural gas, whereas an abnormally cold winter or hot summer raises demand.
  • Other fuels’ availability
  • When other fuels are in short supply or have increasing prices, demand for natural gas rises; conversely, when other fuels are plentiful and at cheaper prices, demand for natural gas falls.

Aside from the cost of the commodity, transportation and distribution also contribute to the price of natural gas. The costs of moving natural gas from where it is generated or stored to distribution utilities through pipeline, as well as the cost of delivering it to customers, are known as transmission and distribution fees.

Resources:

Is there a natural gas exchange-traded fund (ETF)?

UNL, UNG, and GAZ are the three natural gas exchange-traded funds (ETFs) ordered by one-year trailing total returns. To acquire exposure to natural gas prices, all three ETFs hold natural gas futures contracts.

On the stock exchange, how is natural gas traded?

Natural gas prices are frequently represented in currency units per volume or currency units per energy content, depending on the market. For example, per million British thermal units, thousand cubic feet, or 1,000 cubic meters, in US dollars or other currencies. For natural gas pricing comparisons, multiply $ per million Btu by 1.025 to get $ per Mcf of pipeline-quality gas, which is what is delivered to customers. A million Btu is about equal to a thousand cubic feet of natural gas in terms of basic comparisons. The energy value of pipeline-quality gas is somewhat higher than pure methane, which has 10.47 kilowatt-hours per cubic metre (1,012 British thermal units per cubic foot). Natural gas is mostly methane as it comes out of the ground, but it can have a wide range of energy values, ranging from significantly lower (due to non-hydrocarbon gas dilution) to much higher (because to the inclusion of ethane, propane, and heavier compounds) than conventional pipeline-quality gas.

What is the natural gas lot size?

  • Natural gas is found deep down and happens naturally.
  • Natural gas has been used since the dawn of civilization.
  • Natural gas is mostly used for power generation, heating, and cooking.
  • India is the world’s seventh-largest natural gas producer.
  • The natural gas lot size is 1250 MMBtu, yet the price quoted is for 100 mmBtu.
  • Per tick, the P&L is Rs.125/-.
  • Natural gas futures on the MCX follow the price of natural gas on the NYMEX.

Crude Oil

Crude oil is a natural-occurring unrefined petroleum and a fossil fuel that consists of organic components and hydrocarbon reserves, making it one of the greatest commodities to trade.

  • Crude oils are fossil fuels that are not renewable. As a result, it is restricted and cannot be refilled after it has been used.
  • Because it is one of the largest suppliers of crude, political events in the Middle East have an impact on crude oil prices.
  • Natural disasters that have the ability to disrupt crude oil production and raise its price.

Aluminium

Aluminium is a lightweight metal that is used in a variety of industries, making it an excellent commodity to trade.

Aluminium is widely utilized in industries such as autos, construction, and electronics, and it is in high demand.

  • Because the metal is adaptable and widely employed in a variety of sectors.
  • Bauxite is used to make aluminum, and China is the world’s largest producer and user. The demand for aluminum in China’s transportation and construction industries has an impact on its pricing.
  • Aluminum production costs are also affected by the price of oil and energy.

As a result, aluminium is an excellent commodity to trade because of its wide range of price changes.

Copper

Copper is a commonly utilized metal in industries for electrical wiring, utensils, machinery, and other applications.

  • Copper is traded as a commodity in order to speculate on global industrial expansion.
  • Copper prices are influenced by demand and supply in the building industry.

The metal is known as one of the best commodities to trade in India because of its diverse features.

Natural Gas

Natural gas is incredibly environmentally friendly, and numerous industries have been utilising it for diverse purposes in recent years.

  • The Indian government recommends that CNG be used in the power industry.
  • Natural gas is projected to have increased demand in the future because it is less expensive than oil.
  • Natural gas prices in Asia are connected to oil prices. The price of CNG is affected by changes in oil prices.
  • Imports and exports, economic development, storage levels, and other factors all influence prices.

Natural gas can become a profitable commodity to trade if all of these characteristics are together.

Gold

Gold is one of the world’s oldest and most valuable commodities, and it has thus become a significant element of the financial world.

China, Australia, and Canada are the world’s largest gold producers, while India is the world’s largest gold consumer.

  • Gold is regarded as a safe haven asset that protects against economic collapse.
  • Gold is an extremely liquid asset.
  • When inflation grows, the value of the currency decreases, and as a result, individuals choose to invest in gold as a hedge against inflation.
  • Because gold is mostly imported, if the rupee falls versus the dollar, gold prices will certainly rise in terms of the rupee.

Gold is the most popular commodity to trade since it can be traded in contracts of various sizes, such as Gold mini, Gold Guinea, Gold Petal, and so on.

What is the price of a natural gas futures contract?

It is $0.01 per million BTUs for natural gas futures. Daily Price Limit: $3 per million BTUs (not applicable in electronic markets); contracts may grow by $3 in either direction if exchanged, bid, or offered.

Natural gas is traded in what unit?

Natural gas can be priced in dollars per therm, dollars per MMBtu, or dollars per cubic foot in the United States.

1 To translate these costs from one price basis to another, the heat content of natural gas per physical unit (such as Btu per cubic foot) is required. The annual average heat content of natural gas provided to consumers in the United States in 2020 was around 1,037 Btu per cubic foot. As a result, 100 Ccf of natural gas equals 103,700 Btu, or 1.037 therms. A thousand cubic feet (Mcf) of natural gas equals 1.037 million British thermal units (MBtu), or 10.37 therms.

These calculations can be used to convert natural gas prices from one pricing basis to another (assuming a heat content of 1,037 Btu per cubic foot):

Natural gas heat content varies by location and type of natural gas customer, as well as with time. For information on the heat content of the natural gas they supply to their clients, consumers and analysts should contact natural gas distribution firms or natural gas suppliers. Customers’ invoices may include this information from some natural gas distribution providers or utilities.

1 Natural gas was measured in cubic feet by the US Energy Information Administration from 1964 to 1964 at a pressure of 14.65 psia (poundspersquareinchabsolute) at 60 degrees Fahrenheit. Since 1965, the pressure basis has been 14.73 psia at 60 degrees Fahrenheit.