Natural Gas Trading Strategies for 2020: Have You Considered CFDs?


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Historically, natural gas has been a regional business. However, recent developments such as compressed natural gas (CNG) could soon change the economics of the business and make trade in natural gas more practical.

Still, regional economic, political and regulatory factors matter to natural gas prices more so than to many other commodities. With that in mind, traders might consider trading natural gas for the following reasons:

  1. Clean Fossil Fuel Demand
  2. Inflation and Weak US Dollar Hedge
  3. Portfolio Diversification

Read on to learn more about these factors, or skip ahead to learn about how and where to get started trading natural gas.

Bet on Clean Fossil Fuel Demand

Natural gas is considered a much more environmentally-friendly fuel than petroleum or coal. It burns cleaner and produces fewer carbon emissions.

In addition, natural gas is lighter than air. In the case of a leak, it will dissipate, which gives it a safety advantage over gasoline.

Global Carbon Emission Comparison line chart
Global Carbon Emission Comparison via Mak Thorpe on Wikipedia

Natural Gas as a Hedge?

Investing in natural gas is a way to bet on a weak US dollar and higher inflation.

Natural gas is priced in US dollars, so the performance of the world’s largest economy can impact its price. The US Federal Reserve Bank has kept interest rates low and the US dollar weak for many years.

A weak dollar could stoke inflation concerns. Since there is a limited supply of natural gas, the price of the commodity could benefit from fears of inflation.

Diversify Your Portfolio 

Investing in natural gas along with other commodities is a way to diversify an investment portfolio.

Investors seeking true asset class diversification should consider putting a portion of their investable assets into a basket of commodities including natural gas, other energy commodities, metals and agriculture.

How Can I Invest in Natural Gas?

Investors have several ways to invest in natural gas:

Method of InvestingComplexity Rating (1 = easy, 5=hard)Expiration Dates?Management Costs?Leverage?Regulated Exchange?
Natural Gas Futures5YNYY
Natural Gas Options5YNYY
Natural Gas ETFs2NYNY
Natural Gas Shares2NNYY
Natural Gas CFDs3NNYY

Natural Gas Futures

The Chicago Mercantile Exchange (CME) offers a contract on natural gas futures. The contract is based on delivery at the Henry Hub in Louisiana, a location where multiple interstate and intrastate pipelines converge. The contract settles into 10,000 million British thermal units (mmBtu) of natural gas.

The contract trades globally on the CME Globex electronic trading platform and has a variety of expiration months.

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are physically settled by delivery of natural gas.

Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.

Natural Gas Options on Futures

The CME offers an options contract on natural gas futures.

Options are also a derivative instrument that employ leverage to invest in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of natural gas futures rises above the strike price by an amount greater than the premium paid for the contract. Therefore, options traders must be right about the size and timing of the move in natural gas futures to profit from their trades.

Natural Gas ETFs

These financial instruments trade as shares on exchanges in the same way that stocks do.

There are several ETFs that invest in natural gas including some that make leveraged bets on the commodity. However, traders should be wary of leveraged ETFs since they reset each day. This makes them only effective as day-trading instruments. The most popular non-levered natural gas ETFs include United States Natural Gas Fund and First Trust ISE-Revere Natural Gas Index Fund.

United States Natural Gas FundFirst Trust ISE-Revere Natural Gas Index FundS&P Oil & Gas Exploration & Production Select IndustryDow Jones U.S. Oil & Gas IndexVelocityShares 3x Long Natural Gas

Natural Gas Stocks

There are many publicly traded companies that have various levels of exposure to natural gas prices. While investing in companies can be a leveraged way to gain exposure to natural gas prices, many of these companies have exposure to other products such as crude oil.

In addition, these shares can react to other factors such as regional demand for their products, competition, production costs and interest rates. Finally, factors such as company management and the overall stock market can also affect these investments:

 Current PriceOverviewListingsFounded
BHP Billiton 

logo
Anglo-Australian multinational mining, metals and natural gas company.London (LSE)
New York (NYSE)
Johannesburg (JSE)
Sydney (ASX)
1885
Antero Resource Corporation 

logo
Natural gas and oil company based in Denver, CO.New York
(NYSE)
2002
Enterprise Products Partners 

logo
Natural gas and oil pipeline company headquartered in Houston, TX.New York
(NYSE)
1968
Phillips 66 

logo
Multinational energy company based in Houston.New York
(NYSE)
1917
Cheniere Energy 

logo
Developer and operator of natural gas terminals.New York
(NYSE)
1983
Cabot 

logo
Independent oil and gas company engaged in shale exploration in the United States. The company also purchases natural gas for resale.New York
(NYSE)
1989
Chesapeake Energy 

logo
US company that acquires, explores and develops properties that produce oil, natural gas and natural gas liquids.New York
(NYSE)
1989
Sandridge Energy 

logo
US oil and gas company that explores and develops properties that produce oil, natural gas and natural gas liquids.New York
(NYSE)
2006
Stone Energy 

logo
Independent oil and gas company that explores for oil and natural gas in the Gulf of Mexico.New York
(NYSE)
1993

Natural Gas CFDs

One way to invest in natural gas is through the use of a contract for difference (CFD) derivative instrument.

CFDs allow traders to speculate on the price of natural gas and natural gas shares.

The value of a CFD is the difference between the price of natural gas (or shares) at the time of purchase and its current price.

Many regulated brokers worldwide offer CFDs on natural gas and natural gas shares. Customers deposit funds with the broker, which serve as margin.

The advantage of CFDs is that traders can have exposure to natural gas prices without having to purchase shares, ETFs, futures or options.

Where Can You Trade Natural Gas?

If you are looking to get started trading natural gas and other energy commodities, here’s a list of regulated options available in to consider.

Natural Gas Brokers Available in

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 71.00%-89.00% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

What Do the Experts Think About Natural Gas?

Many energy companies see natural gas as a key driver of their future growth. A CEO of one of the world’s largest energy companies sees the energy as the fossil fuel of the future:

Natural Gas experts Patrick Pouyanne, CEO of Total SA

“Natural Gas is flexible enough to offer the right combination with renewables…we are positioning Total more and more in gas, and in 35 years Total will distribute more oil than gas.”

Patrick Pouyanne, CEO of Total SA

The largest oil and gas company in the United States and fifth largest in the world agrees with this assessment:

“Natural gas is a major game changer with fewer emissions, flexibility and abundance.”

ExxonMobil

However, analysts have mixed opinions about natural gas.

One leading analyst believes that increased US production of natural gas from shale and declining demand will produce lower prices in the future:

“Natural-gas prices are very low and have been for a while. It’s also a by-product of the shale revolution in the U.S. Natural gas is what powers most of our electricity needs, right? And that combined with renewables is another important trend that will affect energy prices globally. So we also have a negative long-term view.”

Dan Chung, Fred Alger Management

Should I Consider Trading in Natural Gas?

Natural gas prices can be volatile, and traders should expect large price swings.

However, investing in natural gas can be part of a sensible plan to mitigate risk and diversify the composition of assets in a portfolio.

Investing in a basket of commodities that includes natural gas, other energy commodities such as gasoline and crude oil, agricultural commodities and metals can protect against inflation. It can also protect a trader from the volatility of movements in individual commodities.

There are three specific trends that could boost natural gas prices in the years ahead:

  1. Global Demand
  2. Environmental Concerns
  3. Regulation

Global Demand

Developments in CNG have the potential to make natural gas more of an international commodity. As transportation of natural gas becomes more affordable and practical, demand for the commodity could surge.

Environmental Concerns

Some fossil fuels such as coal are receiving intense scrutiny because of the pollution they create. These concerns make greener energy sources such as natural gas more attractive.

Regulation

Fossil fuels such as coal and crude oil produce harmful and toxic carbon emissions. China is regulating the production of these dirty fuels and replacing coal-fired plants with natural gas and wind. 

Wind Power China via Wikimedia
Wind Power China via Wikimedia

However, traders should also consider the risks of trading in natural gas:

  1. A global recession could weaken energy demand.
  2. Higher natural gas prices or lower costs for even greener sources of energy could lead consumers to substitute consumption.
  3. Global economic or political turmoil could strengthen the US dollar and weaken demand for commodities.
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