Discover how to trade and invest in Natural Gas with our step-by-step guide – including alternatives for diversifying risk, what moves the price, and the ways you can get exposure with us.
The price of natural gas fluctuates from moment to moment, as it is publicly traded on an exchange. This price is determined by global supply and demand for the physical commodity, as well as the expectations and supply and demand from traders.
There is quite a bit you should know before you dive in. If you want to trade and invest in the natural gas market, here is a quick guide that can help.
Natural Gas Trading and Investing - Quick Guide
- Research your markets – you can get direct exposure to natural gas price movements through futures contracts, or indirect exposure through shares of gas sector companies.
- Define your strategy – trading lets you speculate on the price movement; dealing lets you take direct ownership of the stocks.
- Take your position – create an account with us to trade and invest in natural gas.
Natural Gas as an asset
Natural gas may be a critical "bridge fuel" during the energy transition to lower-carbon alternatives. It can help bridge the gap by supplying cleaner baseload power and helping to offset the intermittency issues of wind energy and solar power. In places where renewable energy is not available, there will frequently be a need for natural gas.
The European Union's desire to phase out Russian gas imports in response to the invasion of Ukraine has created dislocation in the market and medium-term tightness in supply.
Given the unique characteristics of natural gas, demand is on track to continue growing in the coming years. The International Energy Agency (IEA) sees natural gas demand rising 22% by 2040, outperforming an expected 16% increase in oil demand. According to the IEA, developing Asian economies will account for half the growth in natural gas demand, and there is a significant opportunity for gas exporters, including liquefied natural gas (LNG) producers, to claim new export markets.
Natural gas is used in power and heat generation, heavy and light industry, and transportation. This means that as long as the industry has energy needs and households from all over the world use gas for cooking and heating, investors can expect the demand for the commodity to remain high.
All the trends make gas an important market for investors.
Why Natural Gas is important for Traders?
The price of natural gas fluctuates from moment to moment, as it is publicly traded on an exchange. This price is determined by global supply and demand for the physical commodity, as well as the expectations and supply and demand from traders.
Here is why natural gas is seen as a key asset for investors and traders worldwide.
Diversification
The presence of the natural gas commodity in an equity-only portfolio can enhance the level of diversification, due to the absence of a correlation between the energy commodities and other asset classes.Safe Haven
Commodities can serve as a safe haven in times of global economic uncertainty and market turbulence because they can retain their value.Inflation Hedging
Commodities’ intrinsic value is independent of currencies. They will often hold their value, even if a currency falls during a period of inflation.Speculation
Natural gas is one of the most commonly traded commodities out there. Being highly volatile, it presents plenty of opportunities for traders.
Commodities may be highly volatile, experiencing wild price swings. Although natural gas suffers fewer price fluctuations than oil, trading natural gas can still be volatile resulting in a high degree of risk. The chance of making large profits goes hand in hand with the risk of large losses.
There is no way to simply purchase a physical supply of gas. Especially trading physical natural gas is complicated and not like precious metals like gold or silver. Therefore, in order to get exposure to the movement of the blue fuel market, the most optimal solution for individual investors and institutions is online gas trading and investing.
Here's a closer look at how to trade and invest in natural gas.
Trading and Investing in Natural Gas Directly
The only way for investors to gain direct exposure to natural gas prices is through futures contracts and fund that holds natural gas futures contracts.
1. Natural Gas Futures
The most common way that traders take a position on natural gas is with a futures contract, in which traders agree to the delivery of a certain amount of natural gas at a set date in the future for an agreed-upon price. However, this does mean that the trader may have to eventually take delivery of the asset.
Henry Hub Natural Gas (NG) futures are the industry benchmark, and they are traded through the Chicago Mercantile Exchange Group (CME Group). The name comes from the Henry Hub, a natural gas pipeline in Louisiana that serves as the official delivery location for futures contracts. By volume, natural gas futures are the third largest physical commodity futures contract in the world.
On the futures exchange, the price of natural gas (NG) fluctuates in $0.001 increments. This increment is called a "tick"—it's the smallest movement a futures contract can make. If you buy or sell a futures contract, how many ticks the price moves away from your entry price determines your profit or loss. To calculate your profit or loss (your trading platform shows you, but it's good to understand how it works) you'll first need to know the tick value of the contract you're trading.
For a Natural Gas contract (NG) the tick value is $10. This is because the contract represents 10,000 mmBtu, and 10,000 mmBtu multiplied by the $0.001 tick size results in $10. That means for each contract, a one-tick movement will result in a profit or loss of $10. If it moves five ticks, you win or lose $50. If it moves five ticks and you're holding three contracts, your profit or loss is $150.
With CAPEX.com, you can speculate on the price of a futures contract – without taking ownership of the underlying asset – with a CFD trading account.
2. Natural Gas funds
Another direct method of gaining exposure to gas is through commodity-based gas exchange-traded funds (ETFs). Gas ETFs trade on a stock exchange like stocks and track the performance, less fees, of an underlying commodity index, such as a natural gas index.
The best and only natural gas ETF is the United States Natural Gas Fund. This fund holds natural gas futures contracts to gain exposure to natural gas prices.
UNG is structured as a commodity pool, a private investment structure that combines investor contributions to trade commodity futures contracts. The fund provides exposure to natural gas prices by buying natural gas futures contracts.
UNG aims to replicate the percent change on a daily basis of the price of natural gas delivered at the Henry Hub, Louisiana. It invests in front-month futures contracts, meaning the futures contracts with the nearest expiration dates.
This means the fund is more exposed to the adverse impacts of contango and is thus more appropriate for traders with a short-term strategy. The ETF also may be appealing as an inflation hedge.
With CAPEX.com, you can buy shares in the United States Natural Gas Fund with ownership – through an Invest Account.
Investing in Natural Gas Indirectly
The type of investors who prefer indirect exposure to natural gas is typically those who do not want the added risk of direct exposure to it as a commodity.
1. Natural Gas Stocks
Investors can also invest in gas indirectly by buying shares in individual gas companies. While the energy market is one of the largest, natural gas plays an important role. As a result, several companies focus on it. Some of the best natural gas and oil stocks for investors to consider include:
ExxonMobil
One of the world's largest companies by revenue, ExxonMobil has ranged from the first to the sixth largest publicly traded company by market capitalization from 1996 to 2017. The company ranked third in the world on the Forbes Global 2000 list in 2016. ExxonMobil was also the tenth most profitable company in the Fortune 500 in 2017.
As of 2018, the company ranked second in the Fortune 500 list of largest U.S. corporations by total revenue. More than half of the company's shares are held by institutions. Shareholders include such giants as The Vanguard Group and BlackRock.
Royal Dutch Shell
Royal Dutch Shell (RDSA.UK) is an Anglo-Dutch multinational oil and gas company headquartered in The Hague, Netherlands, and the fifth largest company in the world by revenue in 2020. Shell is the largest company headquartered in Europe and the largest company not headquartered in China or the United States.
Forbes Global 2000 ranking of 2020 ranked Shell as the 21st largest public company in the world. In 2013, Shell ranked number one on the Fortune Global 500 list of the world's largest companies and in that year its revenues were equivalent to 84% of the Netherlands' GDP.
Kinder Morgan
Kinder Morgan is a leader in operating energy infrastructure in North America. It controls the nation’s largest natural gas transmission network, which moves 40% of the natural gas produced in the U.S. In late 2022, it had 71,000 miles of natural gas pipelines to go along with 700 billion cubic feet of storage capacity. Kinder Morgan's infrastructure connects every major natural gas resource play to key demand centers.
In addition to natural gas, Kinder Morgan is also the largest independent transporter of refined petroleum products, independent terminal operator, and carbon dioxide transporter. The company transports oil, renewable natural gas (RNG), and LNG.
EQT Corporation
EQT Corporation is the largest natural gas producer in the U.S. The company focuses on producing gas from the Appalachian Basin, which stretches across Pennsylvania, West Virginia, and Ohio. As of late 2022, EQT owned 1.1 million acres in the core of the Marcellus Shale, producing 6.1 billion cubic feet of natural gas equivalent per day. If EQT were a country, it would be the 12th-largest gas producer in the world.
EQT's size gives it scale advantages and makes it one of the world's lowest-cost natural gas producers. The company also has the best credit profile in its peer group, giving it access to low-cost debt and further reducing costs, which positions EQT to generate significant free cash flow.
Also worthy of investors' attention are other big natural gas companies like Chevron (CVX.US), Hess Corporation (HES.US), Contango Oil & Gas Co., and many more.
2. Energy ETFs
Natural gas investment by purchasing exchange-traded funds instruments (ETFs) is a more diversified choice than a position in a singular gas stock company. Investing in gas and oil ETFs gives you also wider exposure to the market.
This kind of Gas trading can be more balanced and also gives the opportunity to receive dividends. Those instruments are tracking the share prices of a group of gas sector companies from the industry.
iShares U.S. Oil & Gas Exploration & Production ETF (IEO)
IEO tracks the Dow Jones U.S. Select Oil Exploration & Production Index, which is comprised of U.S. equities within the oil and gas exploration and production sector. The market-cap-weighted ETF provides exposure to companies engaged in the exploration, production, and distribution of oil and gas. Exploration and production companies receive the largest exposure, followed by companies involved: in oil and gas refining marketing and transportation; and oil and gas storage and transportation. The fund follows a blended strategy, investing in a mix of growth and value stocks of various market caps.
The top three holdings of IEO are ConocoPhillips, EOG Resources Inc. (EOG), an energy exploration and development company focused on U.S. reserves; and Pioneer Natural Resources.
Energy Select Sector SPDR Fund (XLE)
XLE targets the Energy Select Sector Index, an index of U.S. companies in the oil, gas, and consumable fuel, energy equipment, and services industries. The fund has a low expense ratio and high liquidity, similar to many energy ETFs. More than 90% of the fund's assets are allocated to oil, gas, and consumable fuels companies, with the rest spread among energy equipment and services companies.
Almost half of XLE's assets are invested in three companies, Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), and Schlumberger Ltd. (SLB).
Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 2X Shares (GUSH)
These leveraged ETFs seek a return that is 200% or -200% of the return of their benchmark index for a single day. The funds should not be expected to provide two times or negative two times the return of the benchmark’s cumulative return for periods greater than a day.
These funds track a commodity-related equity index, consisting of a basket of oil and gas-related stocks. They do not invest in physical commodities and should not be expected to directly track the price performance of oil and gas commodities.
What moves the price of natural gas?
Gas prices are highly volatile. That's not just because drivers have few other choices, but also because so many events affect them. Before you can get into the nitty-gritty of predicting gas prices, you need to be aware of the underlying factors that contribute to the price you pay at the pump.
Stored reserves of natural gas
Many countries around the world have stores of natural gas that they can use in the event of a supply glut. By storing natural gas, governments hope to alleviate some of the problems associated with increased prices in times of reduced production.
By keeping stores of natural gas, countries will not need to buy as much during a supply shortage, which would keep demand low for a brief period. However, once a country’s reserves run out or run low, they will need to buy more which in the case of a shortage, means higher prices in lieu of reduced availability of natural gas.
Global demand
Global demand for natural gas has largely been on the rise for the past decade. In the next five years, demand for natural gas is forecast to rise by around 1.6% a year – with most of this rising demand coming from emerging Asian markets.
The US is still the top consumer of natural gas in the world, followed by Russia, China, Iran, and Indonesia. What effect an increasing global demand for natural gas will have on prices remains to be seen. If increased production from Qatar and America can satisfy the rising demand, prices may not be too drastically affected.
The US Dollar's Value
The value of the dollar can affect oil and gas prices. Oil and gas contracts are priced only in dollars. As the value of the dollar rises, the price of gas often falls. Gas-importing countries profit from the rising dollar value, so they don't need to charge as much for oil and gas. That was the case between 2014 and 2016 when the dollar started getting stronger, and global oil and gas prices fell.
Speculation
Commodities traders can create a price bubble through sheer speculation. This happened during the 2008 financial crisis. When the stock market crashed, traders turned to oil and gas futures to make money. Even though demand was falling, and supply was rising. On July 3, 2008, domestic oil prices rose to a record of $145.31 a barrel. It soon sent gas prices to $4.16 per gallon.
Weather
Severe weather, such as hurricanes and storms, can shut down natural gas production hubs for days or even weeks at a time. This means that reserves will run low as supply gets used up, which would cause the price to increase.
Equally, particularly cold winter weather could lead to more people increasing the heat in their homes. This would mean that more natural gas was being used to satisfy an increased demand which would cause its price to increase.
How to Trade and Invest in Natural Gas with CAPEX.com
There are two routes to investing in natural gas: trading on their prices using CFDs or buying the assets in the hope they increase in value.
1. Trading CFDs
As there is no way to simply purchase a physical supply of gas, online trading is the most popular option. CFD trading has the most favorable charge conditions and allows you to customize your personal investment strategy by choosing CFDs on natural gas, shares of natural gas stocks, or ETFs.
A CFD is a financial contract that you trade to earn the price difference between your open and closed positions, without physical delivery or ownership. It’s also a good option for investors, who like high-risk ventures and dynamic trading.
You can trade natural gas by opening positions on NATGAS CFD (contract on price differences) and using financial leverage. Thanks to the leverage trading NATGAS requires only a certain percentage of the whole position. For example, using 1:10 leverage gives you the opportunity to open a 10,000 USD contract by using only a 1000 USD margin.
Thanks to CFD trading, traders can benefit even when the NATGAS price falls - by opening short positions. This kind of speculation can be especially dangerous and volatile because of NATGAS's price action. CFD Natgas trading gives traders an opportunity to maximize their profit faster even when volatility is reduced, but losses can also be larger due to leverage use.
However, you should be aware that CFD trading is fast-moving and requires close monitoring. As a result, traders should be aware of the significant risks when trading CFDs. There are liquidity risks and margins you need to maintain; if you cannot cover reductions in values, your provider may close your position, and you'll have to meet the loss no matter what subsequently happens to the underlying asset.
You might want to trade Gas with CFDs if:
- You are interested in speculating on the underlying price of Natural Gas and other linked assets (stocks and funds)
- You want to trade rising and falling markets – going long and short
- You want to leverage your exposure
- You want to take shorter-term positions
- You want to hedge your portfolio
- You want to trade without owning the underlying asset
2. Buying shares in Gas related stocks and ETFs
There are many ways to diversify the risk of your gas stock assets portfolio. One of them is buying shares of large companies operating in the natural gas market. Natural gas stocks in the long term are in general less volatile than natural gas spot prices. However, small-cap gas stocks are more volatile and riskier and may have bigger potential because of relatively smaller market capitalization and good perspectives.
You might want to invest in Natural Gas stocks and funds if:
- You’re interested in buying and selling gas stocks and ETFs
- You’re focused on longer-term growth
- You want to build a diversified portfolio
- You want to take ownership of the underlying asset
- You want to gain voting rights and dividends (if paid)
Summary
Prices for commodities that are a source of energy, such as natural gas or oil, have historically been volatile because of the numerous factors that can affect their supply and demand levels.
As a result, some of the most popular trading strategies to use during your time on the natural gas market are ones that aim to capitalize on short and medium-term gains such as day trading or swing trading – as the price can shift against you in a long-term position. Trading natural gas futures can be based on fundamentals for swing trading or technical analysis for day trading.
For long-term holdings, stocks and ETFs are not a pure play on the gas prices, but rather an investment in the gas sector, diversifying risk.
Free resources
Before you start investing and trading in natural gas, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.
Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.