How to Invest in Natural Gas
Natural gas prices soared in 2022, reaching price levels not seen since 2008. However, after hitting a high in August 2022, prices have come under pressure.
In this article, we will take an in depth look at investing in natural gas, examine the different methods to trade and invest in natural gas, before providing a step-by-step guide of how to trade natural gas CFDs with Admirals!
Table of Contents
Why Invest in Natural Gas?
Before we look at how to invest in natural gas, let’s consider why someone would want to invest in it in the first place. After all, natural gas is a fossil fuel, the use of which, as the world transitions to renewable energy sources, will be gradually faded out. So, why invest in natural gas?
Whilst natural gas falls into the fossil fuel category along with oil and coal, it’s a cleaner burning source of energy than the other two. In other words, energy produced by natural gas results in less emissions than energy produced by oil and coal.
For this reason, natural gas is likely to play an important role in the transition to net zero emissions over the coming years. In the International Energy Agency’s (IEA) net zero scenario, the percentage of global energy supplied by oil and coal will fall between 2020 and 2030. On the other hand, the percentage of energy supplied by natural gas will remain flat, with production rising in the short-term, before falling towards the end of the decade.
Risks of Investing in Natural Gas
As with any asset, there are risks associated with trading or investing in natural gas, which may lead to traders and investors losing money.
We have already touched on one of the main risks of investing in natural gas, namely the fact that, if the world is serious about achieving net zero emissions, demand for natural gas will fade in the future, which would lead to a fall in price.
Furthermore, demand for natural gas tends to be cyclical, with demand increasing during winter – due to heating requirements – and also tending to increase when the economy is expanding, with the opposite tending to be true in both circumstances.
Natural Gas Trading and Investing
For those interested in gaining exposure to natural gas, the good news is that there are a number of options available to you. We can separate these in to two categories depending on whether you want to trade natural gas or invest in natural gas.
Instruments for trading natural gas tend to be more appropriate for those seeking to speculate on short-term price movements. On the other hand, instruments for investing in natural gas are arguably more suitable for those interested in longer-term exposure to the commodity.
In the following sections, we will identify two examples of how to invest in natural gas and two example of how to trade natural gas.
How to Invest in Natural Gas
In the following sections we will look at the two most common methods of investing in natural gas.
Natural Gas Stocks
One of the most common methods of investing in natural gas is to buy shares in companies which operate in the natural gas industry.
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 trade or invest in natural gas related assets.
An example of a natural gas ETF is the United States Natural Gas Fund LP ETF, which attempts to track natural gas price movements by investing in futures contracts (which we will look at shortly).
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Trading Natural Gas
So, now we know some of the common ways to invest in natural gas, what about trading natural gas in order to attempt to exploit short-term price movements?
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.
Natural Gas Futures Trading
Natural gas futures contracts represent 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.
Unlike stocks and ETFs, natural gas 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 CFD Trading
As with natural gas futures, natural gas CFD trading 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.
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 the commodity’s supply and demand.
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.|
How to Trade Natural Gas CFDs
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 Dashboard
- Click ‘Trade’ next to your account details to open the Admirals Platform
- Search for the natural gas CFD trading symbol and open the instrument page
- Enter the number of natural gas lots you wish to buy or sell and click ‘Buy’ or ‘Sell’ to send your order to the market!
Trade on a Risk-Free Demo Account
Interested in trading natural gas but not ready for the live markets? A risk-free demo account from Admirals allows you to practise trading in realistic market conditions using virtual money before transitioning to the live markets! Click the banner below in order to open an 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.