Natural gas powers our electricity, heats our homes and fuels our vehicles. Understanding how it is traded can help you make better investment decisions.
One futures contract for Natural Gas on the New York Mercantile Exchange (NYMEX) is equal to 10,000 million British thermal units (mmBtu). Traders typically buy or sell in whole numbers of contracts, also known as lots.
What is a Natural Gas Futures Contract?
Natural gas is a fossil fuel used to generate electricity and produce heat. It is piped directly from oil fields to homes or liquefied and transported via ship. Like other commodities, it can be traded 24 hours a day, 6 days a week on the futures market. Trading futures contracts provides an opportunity for speculators to profit from volatile price movements, but it also exposes traders to large losses.
Natural Gas Futures are standardized exchange-traded contracts that convey the right to buy or sell a commodity at a predetermined price on a future date. These trades are made under the rules of a futures commission merchant (FCM). The underlying physical commodity is delivered through an approved pipeline system. The most popular natural gas trading hub is the Henry Hub, named after the natural gas pipeline with the same name that runs through Erath, Louisiana.
Like other energy commodities, natural gas is highly seasonal in its demand. Demand for heating in the winter drives prices higher while warm weather leads to lower air conditioning usage, driving prices down. Prices are also affected by supply, as natural gas producers conserve storage during the summer to ensure enough supplies for winter consumption.
The minimum contract size for natural gas futures is 10,000 million British thermal units (mmBtu), with most traders buying and selling in multiples of that quantity. Contracts expire on various dates throughout the year, and daily price fluctuations are driven by the storage and inventory reports that are regularly disseminated to the marketplace by the Energy Information Administration (EIA).
Traders can also take advantage of volatility in the natural gas market by trading CFDs on the commodity. By leveraging the power of leverage, a trader can speculate on prices without taking the risk of purchasing the underlying asset. With a CFD, a trader agrees to exchange the difference in price between the open and close of the position minus any associated spread and commission fees. This allows traders to profit from price increases as well as decreases in the market, without having to purchase and store any actual underlying asset.
How do Natural Gas Futures Work?
Natural gas is the second most used form of energy in the world today, and it’s one of the most actively traded commodities on commodity exchanges. Traders use it to diversify into the commodity market, hedge risk exposures or speculate on price fluctuations.
A futures contract for natural gas specifies the quantity of the underlying commodity that you’re buying or selling (one lot is 10,000 mBtu). It also includes information on delivery month and year, as well as deliverable grades, which are determined by pipeline specifications in effect at the time of delivery. Natural gas futures are available for trading on the CME Group’s New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE). Each natural gas futures contract has its own unique ticker symbol, which includes the month and year of the specific contract. For example, the ticker for a May 2022 contract is NGK15 @ 2.76, where NG denotes natural gas and “K” represents the month, and “15” indicates the year.
While few people take delivery of physical natural gas directly from a commodity exchange, many buy it as part of a financial transaction to hedge their price risks in the physical market. Others buy it as a way to speculate on price movements, either because they believe that the price will rise (buying a call option) or they believe that the price will fall (selling a put option).
Most of the supply for natural gas is found underground, which makes extraction difficult. To get at it, companies typically have to use a process called hydraulic fracturing, or fracking, in which water and chemicals are pumped into the ground to break up the rock and release the gas. This technology has been controversial, and in response, several governments have imposed restrictions on how it’s done.
At Plus500, you can trade CFDs on the value of natural gas, allowing you to make profits from both rising and falling prices without having to purchase the underlying asset. In addition, you can use leverage to increase your investment and potentially magnify your returns. All you need to do is open a live trading account, develop your strategy and start trading.
How Can I Trade Natural Gas Futures?
Natural gas futures are a commodity traded on an exchange that represents the price of this renewable, environmentally friendly energy resource. These commodities are highly volatile and can be extremely profitable for traders who have the right strategy and knowledge. There are many different ways to trade a commodity like natural gas, including the use of a futures trading platform and a broker that offers these products.
The CME Globex electronic trading platform is where you will find the most liquidity and options for trading natural gas futures. These contracts are physically settled at the Henry Hub in Louisiana, where multiple interstate and intrastate pipelines converge. Each contract settles into 10,000 million British Thermal Units (mmBtu). Natural gas is a seasonal commodity, and it is important to understand what influences the price of this product at certain times of the year.
There are also a number of factors that influence the supply and demand of this commodity. Some of these factors include economic conditions, oil prices, and the availability of fracking technology. Fracking is a process that involves pumping water and chemicals into the ground to extract natural gas from shale formations. The US is a leader in the development of this technology, which has helped the country become one of the largest natural gas producers in the world.
Another factor that affects the price of natural gas is weather conditions. When temperatures are colder, there is a greater demand for the commodity, and this can drive prices higher. Conversely, warm temperatures can lead to lower demand and a reduction in prices.
In addition to trading futures, you can also use options contracts to make leveraged bets on the price of natural gas. If you think the price of this commodity will rise, you can buy a call option, and if you think the price will fall, you can sell a put option. In both cases, you will need to deposit additional margin in your account in order to maintain a position.
If you are interested in trading natural gas, the first step is to register with a futures trading broker. This will give you access to the exchange where these contracts are traded, and your broker will help you clear your trades. You can then start trading by opening a live trading account and choosing the option contract that interests you.
What are the Benefits of Trading Natural Gas Futures?
Natural gas is a versatile commodity that can be used in a variety of ways. It is used to generate electricity, produce heat, and transport goods. It is also safer to handle than gasoline and it is much cleaner than oil. As a result, many consumers turn to natural gas for home heating, industrial furnaces, and powering their air conditioning units. It is a highly coveted resource and traders can profit from changes in its price through futures contracts.
A natural gas contract is a standardized legal agreement to buy or sell a commodity at a predetermined price at a future date. While futures trading allows traders to make profits without ever taking physical ownership of the underlying asset, it is important to understand the factors that can affect the price of the commodity.
Like other commodities, natural gas prices are influenced by supply and demand. The Energy Information Administration publishes weekly storage and inventory reports that can have a significant impact on the market. In addition, the price of natural gas is often influenced by weather conditions. For example, if it is getting colder, people will need to use more heating to keep their homes warm and this can put a strain on supplies.
Another factor that can influence the price of natural gas is inflation. Since the US dollar is priced in dollars, a strong US economy can lead to higher rates of inflation, which could in turn push up the price of natural gas. The price of natural gas is also impacted by a variety of other factors, including rig counts, production levels, and capital expenditures.
In addition, the supply of natural gas is limited and can be difficult to transport to consumers. Because of this, the price of natural gas is often correlated with the cost of drilling and transportation. This makes it important for investors to monitor news and events that can impact the price of the commodity.
Conclusion:
Natural gas futures provide traders and investors with the opportunity to participate in the natural gas market without having to physically buy or sell natural gas. Traders can use natural gas futures to speculate on price movements or hedge their exposure to natural gas price risk. As with any futures contract, natural gas futures have a standardized contract size, delivery date, and settlement procedure.
FAQs:
- What is the minimum investment required to trade natural gas futures?
The minimum investment required to trade natural gas futures can vary depending on the broker you choose. Some brokers may require a minimum account balance of a few thousand dollars, while others may have no minimum investment requirement.
- How are natural gas futures priced?
Natural gas futures are priced based on the current market demand and supply for natural gas, as well as other factors such as weather patterns, geopolitical events, and economic data.
- What is the settlement procedure for natural gas futures?
The settlement procedure for natural gas futures varies depending on the exchange on which the contract is traded. Generally, settlement can be done through physical delivery or cash settlement.
- How can I use natural gas futures to hedge my exposure to natural gas price risk?
To hedge your exposure to natural gas price risk, you can take an opposite position in natural gas futures from your physical natural gas holdings. For example, if you own natural gas, you can sell natural gas futures contracts to hedge against a potential decrease in natural gas prices.
- Are there any risks associated with trading natural gas futures?
Yes, trading natural gas futures carries a number of risks, including market risk, liquidity risk, and operational risk. It is important to understand these risks and have a solid trading plan in place before trading natural gas futures.
