Natural Gas – Commodity

Instrument description

Apart from crude oil, natural gas is the second most important energy commodity in the world. Natural gas is a fossil fuel along with crude oil and coal. Natural gas is also found as a byproduct when crude oil is extracted from the earth’s surface. Natural gas is organic and mostly made up of plant and animal remains that have been deposited into the earth surface millions of years ago.

Natural gas is mostly composed of methane, and some hydrocarbon liquids and some non-hydrocarbon gases. The natural gas reserves are embedded deep underground and found alongside crude oil and coal. Natural gas is first treated and then transformed into an energy source that can be utilized in the industries and houses. The primary purpose of natural gas is to be used for cooking, heating, generating heat and electricity and also in transportation. The main uses of natural gas include

• In the U.S alone, natural gas contributes to 36% in the electric power sector and nearly 30% of electricity generation
• Almost 34% of natural gas is used to meet the industrial demand in U.S. Natural gas is used as a raw material in the production of chemicals, fertilizers, other industrial products
• Nearly 16% of natural gas is used in households, and more than half the U.S population uses natural gas to cook food, dry clothes, and warm the buildings and water in winters.
• Almost 11% of natural gas is used in the commercial sector and mostly to heat buildings and water, cooking, drying clothes, and in refrigeration
• Just 3% of natural gas is used as fuel in the transportation sector.

Natural gas is extracted from numerous parts of the world, but the United States is the largest gas producer. The five largest gas-producing countries according to Billon Cubic Feet Meters (BCM) are

1. USA - 951
2. Russia - 740
3. Iran - 240
4. Canada - 183
5. China – 175

Most of the gas across the world is used for generating electricity and heating buildings and preparing food. The top five countries having the most natural gas reserves according to Billon Meters (B.M.) are

1. Russia - 47800
2. Iran - 33500
3. Qatar - 24300
4. USA - 8714
5. Saudi Arabia - 8602

History of Natural Gas

The presence of natural gas under the earth’s surface is said to form millions of years ago. The dead remains of plants and animals decayed and resulted in a thick layer of organic matter that mixed with sand and silt with time and slow but constant movement of earth. With time, the rocks, and sand completely covered the organic matter, and the internal pressure and heat underground transformed the fossil fuel. A deep hole is drilled to extract crude oil and natural gas from beneath the earth’s surface.

Natural gas is found either trapped in layers of rock, in small pores of sedimentary rocks, or in coal deposits. A very small percentage of gas is also found in biogas. The geologists usually study the composition of land and oceans and do surveys that suggest the possibility of natural gas reserves. Seismic surveys are mostly used, which is a technique where sound waves are directed towards the earth’s surface, and the sound waves bounced back and recorded, which determines which rock formations have natural gas present in them. First, an exploratory well is drilled to see if the rocks contain gas or not. Upon confirmation, the drilling process is started on the development wells where gas is extracted and brought to the surface.

Although natural gas is known to be a fossil fuel since ancient times, the importance of natural gas grew during the Industrial Revolution. In 1785, the British used to light the houses and streets through natural gas extracted from coal. The first natural gas well was discovered in 1821 by William Hart in Fredonia, New York and the Fredonia Gas Light Company became the first American to distribute gas. The advancement in the infrastructure allowed the distribution of gas to other sectors through heavy-duty pipelines. Today, there are more than 900 gas distribution systems in the U.S.

Supply and Demand of Natural Gas

The natural gas reserves are found all over the world, but gas supplies are present in a finite amount, and it takes tremendous effort and resources to survey, develop, and drill new sites for gas exploration. As the world population grew, the usage of natural gas is also growing, and there is an increased amount of gas demand, particularly for developing countries.

The changes in supply and demand for natural gas cause wide fluctuations in prices of natural gas. There are many underground storage facilities that can supply gas when the domestic supply is unable to meet the demands. The supply and demand of natural gas are quite important for countries that do not have natural gas resources and have to import gas through pipelines. The yearly climate change also affects the consumption of natural gas. In winters, there is a certain increase in gas usage as natural gas is used to heat buildings and warm waters.

How to read the price change of Natural Gas

Natural gas is traded as a commodity for 24 hours and 6 days a week on the Chicago Mercantile Exchange (CME) Globex, which is the global platform that allows electronic trading. The symbol of natural gas on CME Globex is ‘NG.’, the price quotation is USD per MMBtu where ‘MMBtu; stands for British Thermal Units and 1 MMBTU equals 1 million BTU. The minimum contract is 10000 million MMBTU. You can trade natural gas with Contract for Difference (CFD) in the U.K. from Monday to Thursday from 00:00 – 21:00 and 22.05 – 00.00 and on Friday from 00:00 – 21:00.

Suppose we analyze the ay and from the range of $2.200 MMBTU to $2.900 MMBTU from September 2019 to the last week of December 2019. The natural gas prices saw a Bearish trend from January 2020 and continue to fall in the following months. The highest recorded value was $2.1058 MMBTU on May 5, 2020. The lowest natural price was $1.4281 MMBTU on June 25, 2020. The market has seemed to improve, and natural gas price currently stands at $1.7660 MMBTU. The Bid price is $1.781 MMBTU, while the Ask price is $1.778 MMBTU.

How to Trade Natural Gas

The natural gas market is quite volatile, with large price movements that can allow short term traders to magnify their gains. The long term investors can also diversify their portfolio by investing in natural gas, but they must also invest in other commodities such as metals and agriculture. You can invest in natural gas through Futures Contracts, Options, Exchange Traded Funds (ETFs), Contract for Difference (CFD), and buying shares.

One of the most popular ways to trade a commodity these days is through a CFD contract where you can speculate on the price movement of the underlying asset without the need to physically buy the asset. You also get the advantage of using margin and trading on leverage which means you can deposit an amount and trade a large position. For example, if you want to trade CFD worth $1000, then you only need to deposit $100 to your CFD provider. You can also trade in upward or downward price movement with CFDs and you can to implement a risk management strategy to try to avoid considerable losses.

Another popular method to invest in natural gas as a commodity is buying shares of global countries that involved in exploration and distribution of natural gas. When the gas prices rise, the shareholders can receive profit. Some of the leading gas exploration companies include Antero Resource Corporation, BHP Billiton, Cheniere Energy, Enterprise Products Partners, Sandridge Energy, Chesapeake Energy, and Cabot.

What causes the price change of Natural Gas?

The price of natural gas is influenced by different factors that include economic aspects of particular countries, climate, political news, and alternative energy sources. Some of the factors include

• Natural Gas Production

If we take the U.S, then domestic demand for natural gas is fulfilled by the large production of gas and its transportation through pipelines. The countries that have gas reserves have developed pipelines to distribute gas. However, few countries import Liquid Natural Gas (LNG) that can be transported without pipelines).

• Economic Growth

The economic growth and stability results in the increase of gas demand and gas prices as the industrial and commercial sector will require an increased supply of natural gas. The increased productivity in the industrial and commercial sector also indicates the growth of the economy. In the industries, the demand for gas leads to an increase in gas prices and gas is used to make various industrial and consumer products.

• Climate

The consumption of gas in the northern hemisphere is moderate throughout the year, but there is a considerable increase in the winter season. Many of the places in the U.S, Europe and Asia can get witness extreme cold conditions that increase the use of natural gas for heating in both residential and commercial sectors. The freezing temperature in some places also affects the pipelines that are used to transport gas which is why there is a shortage of gas, and the price of natural gas rises in the winter season.

• Substitutes

When it comes to energy resources regarding power generation, then natural gas competes with other forms of natural resources that includes water, wind, sunlight and even coal. There are some power plants, steel factories, and paper mills that have the option to substitute among petrol, natural gas, and coal, depending on the cost of fuel. But natural gas is a clean energy resource and produces less carbon emissions as compared to coal.

The regional political and financial factors along with regulatory factors, impact natural gas more than any other commodity. Like most global commodities such as oil and gold, natural gas is also denominated in U.S Dollars and value of USD influences the prices of natural gas. A weak USD results in the rise of gas prices and conversely a strong U.S Dollar indicates the fall of gas prices. The U.S Federal Reserve Bank has kept the value of U.S Dollar and interest rates low to avoid inflation. The development of Compressed Natural Gas (CNG) in developing countries has allowed local consumers to use natural gas at affordable cost, which has also surged the demand for natural gas.

The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator of future results.