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Natural Gas Investing

July 13, 2020 09:52 UTC

Natural gas is one of the most important fuels on our planet. It already meets around 18% of the world's energy needs and this figure is likely to increase in the coming years, with the International Energy Agency (IEA) forecasting that, by 2040, 25% of the world's energy will be supplied by natural gas. In this article, we will explain what natural gas is, its history, how to benefit from natural gas investing and much more!

Natural Gas Investing

What Is Natural Gas?

Natural gas is a type of fossil fuel, found deep below the earth's surface. It contains multiple different compounds, the largest of which is Methane (CH4). Natural gas is used as an energy source but also in the production of various materials and chemicals.

It is formed from the remains of plants and animals, from millions of years ago, which are buried under the earth's surface and mixed together with sand, mud and rock. Over millions of years, these materials have been forced deeper and deeper into the surface of the earth. Over time, pressure and heat have combined to turn these materials into coal, oil and natural gas.

Natural Gas History and Uses

There are records of Chinese civilisations using natural gas in 500 BC, creating pipelines out of bamboo trees to transport it. They used the gas to boil sea water in order to separate the salt and obtain drinking water.

In 1626, natural gas was found in the Americas by French explorers. However, it was not until 1785 that Britain became the first nation to commercially utilise this natural energy source by lighting houses and streets.

Following the second world war, the global natural gas industry soared. By the 1960s thousands of miles of natural gas pipelines were built in the US and the industry continues to grow today.

Natural gas usage is very diverse and is found in many different sectors and industries. We have listed some of the main current uses below:

  • Heating in homes
  • Electric power generation
  • Transport fuel
  • Industrial production of paints, ammonia, fertilisers, plastics, medicines

Why Invest In Natural Gas?

With investments in natural gas, you could potentially take advantage of the expected growth in its demand. Below we have listed a few of the top reasons for investing in natural gas:

  • As mentioned at the beginning of the article, natural gas currently meets around 18% of the world's energy needs, with this figure expected to grow to 25% by 2040
  • Global energy demand is also expected to increase by 25% in the same time period
  • Natural gas is a very versatile fuel
  • It is by far the cleanest burning fossil fuel, emitting about 50% less carbon dioxide than coal
  • It is abundant and can meet growing demand for energy

It is important to note that, as with any investment, natural gas investing carries risk. There are many external factors which affect its price, which we will cover in more detail later on. There is also the possibility of future regulatory pressure from governments, making natural gas extraction more difficult.

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How Can I Invest in Natural Gas?

There are four main ways to start investing and trading in natural gas using different financial products:

  1. Contracts For Difference (CFDs)
  2. Futures contracts
  3. Buying shares in natural gas companies
  4. Exchange Traded Funds (ETFs)

Let's look at each of these options separately in more detail.

Natural Gas CFDs

One of the most accessible ways to start trading natural gas is through CFDs. CFDs are financial products that allow you to speculate on the price of an asset, without ever actually owning the asset in question. Instead, you enter into a contract with your broker agreeing to pay the difference in asset price from the date the contract starts to when the contract is closed.

Some of the advantages of trading natural gas with CFDs are as follows:

  • Trading without taking physical ownership
  • The ability to profit on both falling and rising prices
  • The possibility to trade short-term
  • You can trade using leverage, meaning you are not required to pay 100% of the price of your position
  • The ability to trade smaller contracts to lower your risk

As attractive as these advantages may seem, there are also a few things to bear in mind before you start trading natural gas CFDs.

Although the use of leverage can increase your potential profits, it can also magnify your potential losses if the markets move against you.

You should also note that there are costs involved with trading CFDs, which will be charged by your broker:

  • Spreads
    • The difference between the purchase price and the sale price of an asset, the former of which is always slightly higher than the latter. Meaning that if you open a position and close it straight away, you will lose money
  • Commissions
    • Some brokers may charge a commission in addition to, or instead of, the spread. This is either a fixed amount or a percentage of the trade.
  • Swap fees
    • This is charged by the broker if you keep your position open overnight.

MetaTrader 5 Natural Gas Daily ChartSource: Admiral Markets MetaTrader 5 Natural Gas #NGAS Daily Chart. Date Range: 6 April 2018 - 8 July 2020. Accessed 8 July 2020 at 19:35. Please note: Past performance is not a reliable indicator of future results, or future performance.

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Natural Gas Future Contracts

A common alternative for trading in natural gas, is through futures contracts, or "futures".

A futures contract is an agreement to buy or sell an asset at a predetermined price on a specific date in the future. When entering into a futures contract, the trader has little interest in actually gaining physical ownership of the asset, but can hopefully trade the contract itself for a profit.

Bear in mind that when trading futures, you do not benefit from leverage as with CFDs and so, you may be required to pay a large amount for your initial investment.

Natural Gas Stocks

There are many publicly traded companies which have different levels of exposure in the natural gas industry. Since oil and natural gas are often produced together, a lot of companies specialise in both. This can be an advantage to buying shares in these companies, as you are diversifying your investment over two energy resources as opposed to one.

When looking for a company in which to invest, you should note that natural gas companies are divided into four main categories:

  • Upstream companies
  • Midstream companies
  • Downstream companies
  • Integrated gas companies

Let's look at each type of company in more detail.

Upstream Companies

Upstream natural gas companies are responsible for finding and extracting natural gas.

When evaluating upstream companies, the following factors should be considered:

  • Production levels
  • Cost of production
  • Reserve forecasts - how much natural gas is left in the company's fields

Gas prices are probably the biggest factor affecting the share price of upstream gas companies.

Midstream Companies

After natural gas has been extracted, it must be transported, processed and stored. These stages are handled by midstream natural gas companies. The gas is transported to storage facilities through pipelines, where it is stored and processed into liquid so it can later be transported by vehicle.

When evaluating midstream natural gas companies, some of the things we must consider are:

  • Size and location of pipeline networks
  • Quality of pipeline networks
  • Quality and size of storage facilities

Downstream Companies

Downstream companies are responsible for delivering the natural gas to consumers.

Integrated Companies

Integrated natural gas companies operate in more than one stream. Often, such companies actually work in all three streams, such as ExxonMobil, BP, Total and Chevron.

ExxonMobil Daily Chart MetaTrader 5Source: Admiral Markets MetaTrader 5 ExxonMobil #XOM Daily Chart. Date Range: 13 March 2018 - 8 July 2020. Accessed 8 July 2020 at 19:35. Please note: Past performance is not a reliable indicator of future results, or future performance.

Some smaller companies also operate in multiple streams. Manufacturers who also transport and export gas include Tellurian, who focus on exporting liquified natural gas.

When evaluating an integrated company, you should consider the operations of the entire company: at the beginning, the middle and the end of the stream.

Integrated companies tend to do better than non-integrated companies, especially in times of low oil and gas prices. This is because their refining and sales can compensate for production difficulties.

Natural Gas ETFs

ETFs are a type of security that track a basket of other securities, such as shares or bonds, that together usually represent a specific sector or economy.

There are two types of natural gas ETFs which can be invested in:

  • ETFs that track the price of natural gas
  • ETFs of shares of gas companies

The first type of ETF operates by tracking the price of raw materials crucial in the production of natural gas. It does this by investing in derivatives such as futures contracts. The United States Natural Gas Fund (#UNG) is a prime example of this type of ETF.

ETFs with shares of gas companies give you a good opportunity to get exposure in the entire gas industry and diversify your portfolio by doing so. An example of this type of ETF is SPDR S&P Oil & Gas Exploration & Production (#XOP).

ETFs provide the opportunity to invest in the natural gas industry in a broad sense, as opposed to limiting your exposure to one specific company and increasing your risk. For this reason, they are considered a slightly more reliable way to invest in the industry, however, investors have lower control of their investment and, as with any investment, the market can move against you.

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What Factors Affect Natural Gas Prices

Our dependence on oil and natural gas makes it easy for consumers to notice price fluctuations in their industry.

To the uninformed consumer, these price fluctuations may seem arbitrary, however several important factors influence the prices of oil and gas. The factors which influence natural gas prices, particularly, go further than just supply and demand.

If you are hoping to profit from natural gas investing, you should be aware of these factors so you know what to look out for. Here is a list of the main ones.

  • Cyclical factors
    • Traditionally, demand for natural gas is seasonal, being highest in the winter (due to heating) and weakest in the summer. The price of natural gas tends to reflect this cyclical change in demand.
  • Switching to other fuels
    • Some industrial consumers have the ability to switch between fuel types at their discretion. Therefore, if the price of natural gas is considered too high, these consumers may switch to cheaper alternatives, such as coal.
  • Economy
    • The general state of the economy affects the demand for natural gas. If the economy is performing well, natural gas demand tends to increase to match increases in production. Conversely, when the economy is underperforming, demand will fall.
  • Stock level
    • The Energy Information Administration (EIA) publishes a weekly report detailing current natural gas availability. Price changes frequently change depending on the outcome of this report.
  • Technological progress
    • Advances in technologies that facilitate gas production, as well as innovations for the use of natural gas, increase the volume of gas available which affects price.
  • Natural disasters and crises
    • Natural disasters which threaten natural gas supply cause volatility in price
    • Economic and political crises can also cause price volatility
  • Damage to infrastructure
    • Damages to infrastructure of production may result in a reduction of supply of natural gas

Natural Gas Demand Forecasts

According to the International Energy Agency (IEA) report from September 2019, global natural gas production reached new heights of 3,937 billion cubic metres in 2018, an increase of 4% from the previous year. This growth had been a trend since the global financial crisis of 2008.

According to a report by the IEA in April 2020, natural gas consumption began to decline in the first few months of 2020, even before the effects of the Covid-19 pandemic were felt globally. Milder temperatures than usual in the northern hemisphere are cited as a major reason for this fall in demand. In the first quarter of 2020, demand for natural gas is estimated to have fallen by more than 3%.

The global lockdown caused by the coronavirus crisis has put additional pressure on demand. The IEA report mentioned above, goes on to state that they estimate a 5% decline in natural gas consumption for 2020. Although, this fall could be smaller if there is a faster recovery from global economic lockdowns. The report notes that their forecasted decline in demand is smaller than similar estimates of oil demand in the same timeframe, due to natural gas being less dependent on demand for transport fuel.

This decline in consumption will be the first time since the global economic crisis that consumption has fallen by more than 2%. If the IEA's forecasts are correct, this fall in demand will be the largest recorded decline since natural gas established itself as a major energy source in the second half of the 20th century.

Trading Platform for Investing in Natural Gas

If you want to start trading or investing in natural gas and thousands of other markets, MetaTrader 5 is commonly regarded as one of the best available platforms for doing so.

Traders can easily track the movement of gas prices and a wide range of other financial assets, such as Forex and CFDs on stocks, commodities and stock indices, to name a few.

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Natural Gas Investing - Conclusion

You should now be able to appreciate, if you did not before, that natural gas is one of the most important fossil fuels on earth. Furthermore, despite the unprecedented current global circumstances, the future of natural gas looks bright due to its characteristic of being more environmentally friendly than other fossil fuels.

This, along with forecasted growth in demand, its increasingly simplified transportation and its abundance are reasons why someone may choose to invest in natural gas.

However, as we have mentioned in the article, there are many factors which can affect the price of natural gas and you should carefully consider all of these before deciding whether to invest. As with any type of investment, there is always the risk that the natural gas market will move against you causing you to lose money.

We have discussed the main financial products available for investing in natural gas, CFDs, ETFs, futures contracts and gas company shares. With the exception of futures contracts, these financial products are available at Admiral Markets! Click the banner below to open an account today:

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About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.