How to Invest in Natural Gas
Natural gas prices have soared in 2022, reaching price levels not seen since 2008. But how can traders and investors potentially benefit from this surge in price?
In this article, we will take an in depth look at this important fuel, examine how to invest in natural gas and provide a step-by-step guide of how to trade natural gas CFDs with Admirals!
Table of Contents
What Is Natural Gas?
Natural gas is a type of fossil fuel, found deep below the earth's surface, which is used primarily as an energy source, but also in the production of various other products.
It is formed from the ancient remains of plants and animals, 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 helped turn these materials into coal, oil and natural gas.
What Is Natural Gas Used For?
Natural gas is a very diverse commodity, and it is used in many different sectors and industries. We have listed some of the main uses below:
|1. Heating in homes|
|2. Electric power generation|
|3. Transport fuel|
|4. Industrial production of paints, ammonia, fertilisers, plastics, medicines|
How to Invest in Natural Gas
There are many ways to trade or invest in natural gas, below we have listed four of the most common methods, which we will look at in more detail in the following sections.
Natural Gas Stocks
One of the most common methods of investing in natural gas is to invest in companies which operate in the natural gas industry or, in other words, to buy natural gas stocks.
There are many publicly traded companies which operate in the natural gas industry, and the performances of these companies will tend to improve when the price of natural gas rises.
However, if investing in natural gas stocks, it is important to bear in mind that there are many factors other than the price of natural gas which can affect a company’s share price. That is to say, that just because natural gas prices are rising, it does not necessarily mean that natural gas stocks will rise at the same rate, or even rise at all.
Therefore, it is important to research any natural gas shares thoroughly before investing in them.
Natural Gas ETFs
Exchange-Traded Funds (ETFs) are another financial instrument which can be used to invest in natural gas.
ETFs are publicly listed funds which are designed to track the price of an underlying asset, industry or index. A natural gas ETF, therefore, attempts to mirror the performance of natural gas by using investor capital to invest in natural gas related assets.
Depending on the particular fund, natural gas ETFs can provide good diversification, by investing in a number of different assets. These can make natural gas ETFs good way of investing in natural gas without relying too much on any one asset.
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Natural Gas Future Contracts
Whereas natural gas stocks and ETFs are more suitable for longer-term natural gas investment, futures contracts and Contracts for Difference (CFDs) can be more appropriate for those interested in trading natural gas over a shorter time-period.
A natural gas futures contract is an agreement to exchange the commodity at a predetermined price on a specific date in the future. Futures can be bought and sold on futures exchanges, and many traders who buy and sell them have no interest in actually acquiring or selling natural gas, but simply use futures as a means of speculating on its price.
Futures contracts can be used to speculate on both rising and falling prices, and can also be traded on margin, meaning that those trading natural gas futures can access larger position sizes with a smaller up front deposit. This has the effect of magnifying both potential profits and potential losses.
A drawback of trading natural gas futures is that the contracts have an expiration date. This means that traders have a limit as to how long they can remain in the trade, before having to either exit their position or rollover the contract to the next month (a process which essentially involves exiting the current position and opening a new position in a futures contract with a further-out expiration date).
Natural Gas CFDs
As with natural gas futures, trading natural gas CFDs allows traders to speculate on the price of natural gas by either going long or short.
CFDs represent a contract between two parties agreeing to exchange the difference in the price of an asset from when the contract is opened until it is closed. Again, like futures, natural gas CFDs can be traded on leverage, meaning that traders can access a larger position size with a smaller initial deposit.
Unlike futures, natural gas CFDs do not have an expiration date, therefore, traders can hold open their position for as long as they wish, provided they have sufficient funds in their account to maintain the position. However, traders must be aware of the swap, which is an interest rate charged on CFD positions held overnight.
What Affects Natural Gas Prices?
As with anything, the price of natural gas is determined by levels of supply and demand in the global market. Whenever supply or demand changes, unless it is met with an equal change in the other, the price of natural gas will be affected.
For example, if demand is higher than supply, natural gas prices will rise. Conversely, if supply is higher than demand, natural gas prices will fall. In this way, natural gas prices, as with oil prices, tend to be cyclical, changing as the market adjusts itself to adapt to current levels of supply and demand.
For instance, when demand for natural gas is high, this pushes prices up. This rise in demand and price incentivises natural gas producers to increase supply to take advantage of higher prices. The higher prices will also tend to dampen demand. Eventually, the effect of these two forces is that supply catches up to demand, prices stabilise and then may even start to fall.
Therefore, whether you are considering investing in natural gas for the long-term or trading natural gas over the short-term, it is important to pay attention to any news which could impact on the commodity’s supply and demand.
With that in mind, it is worth noting that the US and Russia are by far the largest producers of natural gas in the world, accounting for around 40% of global supply in 2020. On the demand side, in 2020, the US, Russia and China accounted for around 41% of global consumption1. Therefore, any changes to supply and demand in these countries can have a considerable effect on prices.
Below, we have listed several factors which can have an impact on the supply and demand of natural gas:
|Season. Natural gas prices tend to rise during winter in northern hemisphere, as more fuel is needed to keep homes warm.|
|International Relations. If international relations sour to an extent that sanctions are imposed on a natural gas producing country, this can cause prices to rise.|
|Global Conflict. Conflict, or the threat of conflict, which involves a natural gas producing country can cause prices to rise.|
|Economic Performance. Demand for natural gas tends to have a positive correlation with economic performance. In other words, when the global economy is performing strongly, demand for natural gas tends to increase which causes price to rise.|
Why Is Natural Gas So Expensive Currently?
As mentioned at the beginning of the article, natural gas prices have soared in 2022, hitting their highest levels since 2008. But why is natural gas so expensive at the moment?
The main reason that natural gas is so expensive currently is the ongoing conflict in eastern Europe between Russia and Ukraine.
As we saw in the last section, Russia is one of the world’s largest producers of natural gas, accounting for around 17% of total global production in 2020. Not only this, but Russia is also the largest exporter of natural gas in the world, accounting for 25% of total global exports in 20201.
The ongoing conflict has not only caused concern of a constraint on Russian gas supply, but has also resulted in many Western countries – including the UK, US and the EU – to impose a number of sanctions on Russian energy imports.
Both of these factors have contributed to the rising price of natural gas in recent months.
How to Trade Natural Gas CFDs in 5 Steps
So, now we are more familiar with this commodity and what affects its price, how can you start trading natural gas?
Below, we have summarised how to trade natural gas CFDs in 5 steps!
- Open a Trade.MT5 account with Admirals and log in to the Trader’s Room
- Next to your Trade.MT5 account details, click ‘Trade’ in order to open WebTrader
- Scroll to the bottom of the Market Watch window on the left of the screen, search for natural gas CFDs and add it to the Market Watch
- Once added, click and drag the instrument onto the chart to open a natural gas price chart
- Right-click on the chart, select ‘Trading’ and then ‘New Order’ to bring up an order screen. Here, you can select the amount of natural gas you want to buy or sell, set a stop-loss and take-profit, and send your order to the market!
Natural Gas Investing - Conclusion
Natural gas is one of the most important fuels on earth and, although the world is taking steps to transition away from fossil fuels, we can expect natural gas to remain a crucial energy source for some time to come.
In this article, we have highlighted some of the ways that traders and investors can trade and invest in natural gas and some important factors to bear in mind before entering the market.
As with any type of investment, there is always the risk that the price of natural gas will move against you causing you to lose money and it is therefore essential to apply sound risk management to your trading and investing.
Trade on a Risk-Free Demo Account
One way of helping to reduce your risk is to practise trading any natural gas strategy in a risk-free environment. A risk-free demo account from Admirals is a great place to do this, allowing you to practise trading natural gas using virtual currency in real-market conditions before heading to the live markets! Click the banner below to open your free demo trading account today:
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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.