3 Reasons You Might Invest in Natural Gas
Historically, natural gas has been a regional business. The low density of the fuel makes putting it in cargo ships and transporting it overseas an impractical endeavor. (LNG solves the problem of density, but LNG adoption has been limited due to the high cost of cryogenic equipment and other LNG infrastructure.)
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 should consider buying natural gas for the following reasons:
- Clean Fossil Fuel Demand
- Inflation and Weak US Dollar Hedge
- Portfolio Diversification
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.
How is Natural Gas an Inflation and Weak US Dollar 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.
Should I Invest 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:
- Global Demand
- Environmental Concerns
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.
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.
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.
However, traders should also consider the risks of investing in natural gas:
- A global recession could weaken energy demand.
- Higher natural gas prices or lower costs for even greener sources of energy could lead consumers to substitute consumption.
- Global economic or political turmoil could strengthen the US dollar and weaken demand for commodities.
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 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.”
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
How Can I Invest in Natural Gas?
Investors have several ways to invest in natural gas:
|Method of Investing||Complexity Rating (1 = easy, 5=hard)||Storage Costs?||Security Costs?||Expiration Dates?||Management Costs?||Leverage?||Regulated Exchange?|
|Natural Gas Futures||5||N||N||Y||N||Y||Y|
|Natural Gas Options||5||N||N||Y||N||Y||Y|
|Natural Gas ETFs||2||N||N||N||Y||N||Y|
|Natural Gas Shares||2||N||N||N||N||Y||Y|
|Natural Gas CFDs||3||N||N||N||N||Y||Y|
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 Fund||First Trust ISE-Revere Natural Gas Index Fund||S&P Oil & Gas Exploration & Production Select Industry||Dow Jones U.S. Oil & Gas Index||VelocityShares 3x Long Natural Gas|
Natural Gas StocksThere 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 Price||Overview||Listings||Founded||Number of Employees||Interesting Fact|
|BHP Billiton ||Anglo-Australian multinational mining, metals and natural gas company.||London (LSE)|
New York (NYSE)
|1885||60,000+||The World's Second Largest Mining Company|
|Antero Resource Corporation ||Natural gas and oil company based in Denver, CO.||New York|
|2002||500||Owns 485,000 acres in the southwestern core of the Marcellus Shale.|
|Enterprise Products Partners ||Natural gas and oil pipeline company headquartered in Houston, TX.||New York|
|1968||6,000+||Owns 50,000 miles of pipeline|
|Phillips 66 ||Multinational energy company based in Houston.||New York|
|1917||14,000+||Warren Buffett's Berkshire Hathaway is a significant shareholder|
|Cheniere Energy ||Developer and operator of natural gas terminals.||New York|
|1983||900||Cheniere's NYSE ticker is LNG, representing their biggest product - liquefied natural gas|
| Cabot ||Independent oil and gas company engaged in shale exploration in the United States. The company also purchases natural gas for resale.||New York|
|1989||691||In 1994, the company acquired Washington Energy Resources in a $180 million stock transaction.|
|Chesapeake Energy ||US company that acquires, explores and develops properties that produce oil, natural gas and natural gas liquids.||New York|
|1989||1,000+||The company was founded in 1989 by Aubrey McClendon and Tom L. Ward with only a $50,000 initial investment.|
|Sandridge Energy ||US oil and gas company that explores and develops properties that produce oil, natural gas and natural gas liquids.||New York|
|2006||501+||In November 2015, the company acquired 136,000 net acres in the Niobara shale formation for $190 million in cash.|
|Stone Energy ||Independent oil and gas company that explores for oil and natural gas in the Gulf of Mexico.||New York|
|1993||501+||Stone holds interests in over 100 lease blocks throughout the Gulf of Mexico.|
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.
- No commission on trades (other charges may apply)
- Free demo account
- Easy to use (mobile-friendly) platform
- Industry-leading risk management tools
- Trade natural gas and hundreds of other CFDs
- Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission
Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader 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.