Of the major energy commodities available in the modern world – oil, natural gas, and coal – natural gas is the only one with lower carbon dioxide emissions. Oil remains the most traded commodity on the planet, but natural gas ranks second.
Natural gas is a vital resource for both commercial enterprises and consumers. It is used for generating electricity, heating, and cooking in homes and businesses. Government entities and many commercial enterprises employ fleets of vehicles powered by natural gas in either compressed (CNG) or liquefied (LNG) form.
As of the end of the calendar year 2020, natural gas supplied about 16% of Australia’s total electricity generation. Unlike gasoline and heating oil, natural gas is not a derivative of crude oil, although natural gas is typically found in proximity to oil reserves.
Natural gas does not exist in pools below the earth’s surface as oil does but is most often trapped in rocks and sediment. The marriage of two technologies – hydraulic fracturing and horizontal drilling – freed up natural gas trapped in shale deposits, creating a boom in supply and lowering prices to make gas competitive with coal as a primary source of electricity generation.
The extraction process is expensive, as is the processing required to make natural gas suitable for transport. Pipelines are the primary transport mode, sometimes heading to liquefication processing facilities in port locations for LNG transport around the world.
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In the US natural gas market, the country’s Energy Information Agency (EIA) states that 68% of natural gas is used either for electricity generation (35%) or in industrial applications (33%).
Although governments and multinational firms conduct most trading in natural gas, there are opportunities for retail investors to make a profit by speculating on the movements in its price.
The Benefits of Trading Natural Gas
Governments around the world are committing to carbon reduction targets. The transition to cleaner energy is rapidly accelerating, and some of the world’s largest energy producers maintain that natural gas will play a role.
Shell Oil expects natural gas to meet about 40% of additional energy demand by 2040. Global research and consultancy firm McKinsey & Company do not anticipate a decline in natural gas demand until 2035.
As a scarce natural resource, the price of natural gas tends to rise when inflation is high, and the US dollar is weak because the commodity is priced in US dollars. According to some experts, natural gas is more sensitive to regional economic concerns and regulatory and political environments than most other commodities.
How to Trade Natural Gas
The digital world has opened several avenues for natural gas trading by both short-term traders and long-term investors; both classes of investors are speculating on price movements.
Longer-term investors are speculating on the changes in the stock price of an individual company operating in the natural gas production or distribution space or the price of a “basket” of related stocks in a fund.
Corporations and government entities that need natural gas to operate use futures contracts to hedge against higher commodity prices. If the current price seems favourable, a contract is negotiated to take the delivery of the natural gas at a specified future date at the agreed price, not the price on the day of delivery.
Retailers can get the same benefit without having to take possession of a commodity they have no use for. While it is possible in some cases for a retail trader to enter into a futures contract to sell before the delivery date, the risk is high, and experts strongly suggest it is avoided.
Australian retailers can benefit from natural gas trading through contracts for difference (CFDs). A CFD is a contract between a retailer and a CFD broker. Typically, CFDs are available to purchase on margin, allowing the significant benefit of leveraging the investing dollar. The profit or loss is the difference in the value of the contract between the time it is opened and the time it is closed out.
With a CFD, the retail investor can speculate on the movement of the price of natural gas – up or down. Newcomers to investing would be hard-pressed to find a reputable site that does not warn against the high risk of CFDs, cautioning risk-averse investors and those with minimal experience and time to manage their trades, to stay away.
The safer alternative, although not without risk, is to invest directly in stocks or Exchange Traded Funds (ETFs) that offer a diversified “basket” of stocks.
This option for natural gas trading also allows investors to speculate on the price movement of the stock or ETF by taking a “long” position or shorting the stock. Shorting is betting that the stock price will decline, allowing the investor to pocket the difference between the price of the short at the opening and the closing of the trade.
As an energy commodity, virtually all natural gas producers will also be involved with other forms of energy, usually oil. In addition, some may operate in the natural gas supply chain. There are also stocks operating exclusively in supply chain sectors, such as pipeline operators. Many available ETFs bundle gas producers with other energy producers and distributors.
As of July 2022, Australia led the world in LNG export capacity. The ASX has some of the country’s top exporters, led by LNG pioneer Woodside Energy Group (ASX: WDS), followed by Santos Limited (ASX: STO) and Origin Energy (ASX: ORG).
What Factors Affect the Price of Natural Gas?
Like any other commodity, the price of natural gas depends on the balance between demand and available supply. The war in Ukraine impacted the price because of its impact on supply due to sanctions on Russia, and the COVID Pandemic influenced the price because of its effect on demand.
During economic slowdowns, demand for natural gas may drop, with the price following suit. Weather conditions, regulatory concerns, and political instability in producing countries can all impact demand.
When demand drops, the supply is in excess, decreasing the price. A simplistic view is that too little demand chasing too much supply sends the price lower, while too much chasing too little supply sends the price up.
Choosing a Broker
The choice of broker varies by the preferred option for natural gas trading. Australia does not lack online brokerage house options, with many offering CFD trading and stock and ETF trading.
Fees and commissions are an obvious concern, but of greater import – especially for CFD traders – is a full slate of educational resources on how to trade natural gas in Australia.
Another common factor in choosing a broker is the quality of the trading platform. Some are confusing to all but the experienced investors, while others are “bare bones”, offering a minimum of helpful features.
Customer service is another issue, especially for less experienced investors. Does the brokerage offer live customer service? 24/7 availability and knowledgeable agents are the gold standard.
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Natural Gas Trading Strategies
Strategies for how to trade natural gas for both stocks and CFDs include fundamental analysis, although with different targets. With CFDs, the sole focus is on conditions that impact the price of natural gas. During economic boom times, demand for and the price of natural gas should rise. In troubling times, the opposite is true. Researching and tracking current and potential future weather conditions are additional issues for fundamental analysis.
The focus of fundamental analysis for stocks and ETFs includes economic conditions and conditions specific to the company’s operations. ETFs are harder to use fundamental analysis as a trading strategy because of the number of companies in the ETF portfolio of stocks. Keeping track of the top five or more holdings in the ETF is a start.
Technical analysis and sentiment analysis are two additional strategies for natural gas trading. Technical analysis uses past price movements under conditions similar to current ones, while sentiment analysis tries to gauge the buying and selling behaviour of the investing community as a whole.
After oil, natural gas is the most widely traded commodity. Natural gas is used by corporations, governments, and consumers for a variety of applications, from generating electricity to heating and cooking to powering fleet vehicles.
Natural gas will play a role in the transition to a lower carbon economy, giving investors the benefit of demand stability for the foreseeable future. Natural gas is also beneficial as a hedge against inflation.
Natural gas trading alternatives for Australian investors range from CFDs to profit from upward or downward movements in the price of natural gas to investing in related stocks and ETFs.
Trading strategies for natural gas trading include fundamental analysis of economic, regulatory, political, and weather conditions; technical analysis of historical price movements; and sentiment analysis of buying and selling.