Raw materials have been enjoying great interest among investors for years. The most common belief on the market is that they can generate huge profits in the long term. Their price is influenced by many external factors, which causes increased volatility. The most popular investment of this type is of course crude oil. However, the topic of this article will be natural gas , i.e. natural gas , which comes in second place .
Of course, it is not practically feasible to physically purchase natural gas for investment purposes, as is the case with gold. Its price in relation to the volume simply turns out to be too cheap, which makes it difficult to store.
Various types of financial instruments come with help here, thanks to which you can earn money by speculating on their price on this market. Before we get down to them, let’s start by presenting basic information about this raw material.
Natural Gas – basic information
Natural gas is the fossil fuel most often used to heat residential buildings. In order for it to be used, it must be filtered from, among others, ethane, propane, butane, helium and hydrogen sulfide. All these products are then independently sold by the refiners.
Once upon a time, natural gas was considered a useless side effect from processing crude oil. Today, thanks to modern technologies, it is the cleanest fossil fuel, more environmentally friendly and efficient than coal or oil. Unfortunately, its storage is a significant problem. Usually it is liquefied and supplied via gas pipelines directly from mining fields.
Russia has the largest reserves of natural gas, while the USA has the highest annual resources. Its price is stated in US dollars per MMBTU, which is one million Btu (British heat unit). Let us now turn to an analysis of the natural gas’s past rate.
Historical quotes of NATGAS
The first strong boom on the natural gas market prevailed at the turn of the millennium. In March 1999, the price fluctuated around $ 2, then an upward movement began, which grew even more rapidly after 19 months. Eventually, the peak was reached in December 2000 and was as high as $ 10.48.
This resulted in a severe sell-off, in only nine months the rate saw a decline to $ 1.80. Then the price went up again for 1.5 years, again in the final phase, this move significantly accelerated and a new all-time high was reached, this time of $ 10.81 in February 2003. After this event, there was a decrease again , this time lasted eight months and had a shorter reach, the minimum was $ 3.98.
Later on, the story of natural gas was almost identical again. The Hossa prevailed, this time lasted two years, again the strongest increase was generated at the end, the new historical peak was at the level of USD 15.78, it was reached in December 2005 , to this day the cost of one million Btu of natural gas has remained the highest.
Then the market saw a significant correction, it lasted for nine months, the rate fell to $ 4.29. It was followed by an upward trend for the last time, it lasted less than two years and this time the maximum was $ 13.68, it was in July 2008.
Natural Gas Futures
First, a short explanation – futures contracts are a bilateral agreement to buy / sell a specific underlying asset, in this case natural gas, for a strictly defined price on a given date. They are standardized instruments, and they are traded on individual exchanges, which also means predetermined underlying instruments, execution dates and contract sizes.
As for the second and third points, in the case of the above-mentioned raw material, they expire every month and are included in 10,000 MMBtu, so a lot of capital is required. This is because they are traded on a centralized, open market and the broker or brokerage house is only an intermediary.
Of course, we don’t have to hold the contract until it expires. We can sell it at the current market price if there is sufficient liquidity in the market. In the event that there is no investor willing to buy it back, the position is closed at expiry at a predetermined price.
The futures market is intended for experienced investors and is speculative in nature. Additionally, it has a leverage of 1:10.
CFDs on Natural Gas
The second way to invest in natural gas is through CFDs . They are the easiest to use and possibly the most popular way to invest in commodities. Their name comes from the English language and is an abbreviation of Contracts for Difference, i.e. contracts for differences.
The CFD market is over-the-counter, which means that the transaction is between an investor and a broker and not in the real market. The CFD follows the movement of the underlying asset, which in this case is natural gas. After opening a buy position, when the price of the underlying instrument goes up, we make money on its rise, and the selling side loses, and vice versa.
We do not buy the asset physically, we only speculate about a change in its price in the future. As in the case of futures, we can place long and short orders on the CFD market, and the financial leverage on natural gas in Poland is 1:10.
However, their advantage is the other two issues, i.e. the expiry date and the size of the contract. The time limit does not apply, so you can close your position at any time as long as the market is open and it is lightning fast as the broker undertakes to pay the difference in any situation after placing the order. What’s more, in this case, we can adjust the size of the contract ourselves to the capital and risk management strategy , they are not standardized, so you do not need large funds to start investing on them.
Additionally, virtually every broker offers CFDs on natural gas, so there are no problems with their availability. Therefore, it is probably the easiest, fastest and cheapest form of speculation on commodities in terms of commissions and spreads.
Options on NATGAS
The third way to invest in Natural Gas is through options . It is an instrument that gives their buyer the right to perform a specific operation. Their characteristic feature is that they can use it, but they do not have to, while the other party to the transaction, i.e. its writer, is already obliged to fulfill the option. The conditions are determined by the exchange and in the case of natural gas they are the same as for futures contracts, i.e. they expire after a month and are concluded for 10,000 MMBtu and their strike price is strictly defined.
There are two types of options – buy and sell. It should also be added that they also allow the use of financial leverage. So far, this market is very similar to the futures market, what’s the difference?
In the case of options, we additionally pay an option premium, which is basically the cost of purchasing this instrument. However, as mentioned above, there is no obligation to do so. So, if the price of natural gas goes the other way than expected, we don’t need to activate this security until it expires and we only bear the cost of the premium. Of course, they can be made at any time before that date.
So the risk of loss in this case is known at the beginning of the trade and the potential profit is practically unlimited.
ETFs on Natural Gas
The last form of investing in Natural Gas with instruments is Natural Gas ETFs . Their name is an abbreviation of the English Exchange Traded Fund, it is a cash market instrument, which is an open-ended index fund, listed on stock exchanges around the world, which means that they operate on the same principles as company shares. The purpose of an ETF is to map the movement of a specific financial instrument .
It is a passive fund – the rate of return should be as close as possible to the superior asset, and not exceed it. Their advantage is high fluidity. Disadvantages? In the case of ETFs, we can only earn on increases, and low leverage is offered for this raw material.
The most recommended Natural Gas ETF is VelocityShares 3x Natural Gas ETN . Its founder is Credit Suisse and is listed on the NYSE. It offers exposure to rising prices with a leverage of 1: 3. The downside is the management commission of 1.65% per annum.
The second fairly popular ETF is ProShares Ultra Bloomberg Natural Gas , also listed on the NYSE. It has a leverage of 1: 2 and the management fee is 0.95%.
What to pay attention to when trading natural gas?
Contrary to stocks of companies or stock indices, the price of such commodities as natural gas is strongly influenced by fundamentals of a completely different kind. The first important aspect is the political situation in exporting countries . In the case of the US, this may not be a major problem, but the military conflicts involving Russia are. However, the greatest impact on prices is seen in the Middle East mining countries such as Iran and Qatar. If the situation is tense there, prices should rise.
The second important thing is the weather . Natural gas is both an important heating and energy resource, therefore the global frost and heat wave, especially in developed countries, increases its consumption, which should result in an increase in its cost.
Also of note is the weekly release of natural gas stocks by the US Energy Information Administration , which takes place every Thursday. It most often causes increased volatility in the market, especially when the value is significantly different from the experts' forecasts.
Is it worth investing in Natural Gas?
Investing in natural gas, due to its high volatility, the variety of instruments that offer to speculate on it, and the enormous price growth potential in this market, seems to be a great way to earn big profits.
However, due to the characteristics of this raw material, CFDs are considered the best form of investing in it. What’s more, they have the lowest fees of all three instruments, the fastest execution, reliable market liquidity, do not require a large deposit to conclude a transaction, making them available to virtually every trader.
Therefore, contracts for difference are a recommended form of investing in natural gas, especially beginners should focus on them.