Natural gas is used in a variety of ways to generate electricity, heat homes and fuel vehicles. Its price fluctuations can have important implications for the economy, especially during times of global uncertainty.
The NYMEX division of the Chicago Mercantile Exchange offers futures contracts for natural gas. Each contract has a ticker, an expiration date and a contract value.
What is a Natural Gas Futures Contract?
A natural gas futures contract is a standardized financial instrument that reflects the price of the commodity for delivery at a specified time in the future. It is traded on an exchange, such as the New York Mercantile Exchange (NYMEX) in the United States or the Intercontinental Exchange (ICE) in the U.K and Multi Commodity Exchange (MCX) in India. Like all other commodities, a variety of factors can affect the price of natural gas. The most well-known factor is weather patterns; however, global tensions and the development of alternative fuel sources can also impact prices.
The most commonly traded natural gas futures contract is the Henry Hub contract. The name comes from a gas pipeline of the same name that runs through Erath, Louisiana and is the nexus of 16 interstate natural gas pipeline systems that draw supplies from the region’s abundant natural gas deposits. The contract specifies the physical delivery point for natural gas, and is traded at a specific price, known as the Henry Hub index, which serves as the nation’s benchmark natural gas price.
There are several different types of natural gas futures contracts available to traders, depending on their needs. Traders can buy and sell the current month’s contract, or purchase and sell a number of consecutive months to manage their exposure. Alternatively, they can choose to buy and sell an entire year’s worth of the commodity by purchasing a futures strip. In this case, they will need to place collateral with their clearing firm and exchange in the amount of their total position.
The majority of natural gas futures contracts do not result in delivery as most buyers and sellers close out their positions prior to expiration. Those that do require a firm commitment to make or take delivery of a specified quantity and quality of natural gas in a future period at a price agreed upon at the time of the futures contract’s trade.
Traders can also purchase and sell options on natural gas futures contracts, which give them the right to buy or sell an underlying asset at a predetermined price at a later date. The value of an option decreases over time due to a concept called theta, which is a measure of how fast the underlying price is decaying.
Why Trade Natural Gas Futures?
Natural gas is used as an alternative energy source for many applications including powering vehicles (as it produces less pollution), heating homes and cooking food. It is also used as a source of power for industrial furnaces and plays a significant role in producing electricity worldwide. It accounts for over 25% of energy usage in the United States and up to 1/3rd globally. It is no wonder that it’s one of the most actively traded commodities in the world.
It is a commodity that has seasonality, meaning that prices tend to move in predictable patterns throughout the year depending on the weather conditions. In addition, natural gas prices can be affected by other factors such as the Energy Information Administration’s weekly storage and inventory reports.
As a result of its numerous applications and growing demand, the natural gas market is very active on commodities exchanges around the world. Traders who have a good understanding of its fundamentals and technical analysis can make some excellent profits trading the commodity.
The most popular way to trade the commodity is through futures contracts, a type of derivative instrument which gives buyers and sellers the right to exchange a standardized quantity of the asset at a pre-specified price on a specific date in the future. CFDs, or Contracts for Difference, on the other hand, allow traders to speculate on the movement of a natural gas contract’s price without the obligation to take physical delivery of the underlying asset.
In the case of a futures contract, there are a number of different contracts available on a variety of commodity exchanges including the Chicago Mercantile Exchange and the Intercontinental Exchange. The contracts are listed with a symbol which includes the month and year of the contract. For example, the contract for March 2022 is NG20-22.
The pricing of the commodity is based on the location known as Henry Hub in Louisiana, USA and all futures contracts are quoted against this benchmark. The NG futures price is often referred to as the ‘norm’ for the industry and is therefore closely watched by traders, investors and producers.
How to Trade Natural Gas Futures
Natural gas plays a vital role in the global economy, helping to generate electricity, heat homes and fuel vehicles. It also has many industrial uses, which is why traders are always on the lookout for opportunities to trade this commodity.
Traders can find a wide variety of online trading platforms and brokerage services that offer natural gas futures contracts. The process of opening a trading account is quick and easy, with most platforms offering demo accounts to practice your strategy before investing real money. Once you’ve opened a trading account, you can deposit funds and begin placing your first trades.
When trading commodities, it is important to understand the risk involved and to follow a well-rounded investment approach. This includes understanding fundamental and technical analysis, proper position sizing and the use of stop-losses to protect your profits. Additionally, it is important to stay informed about current economic indicators, as they can have a direct impact on the price of a commodity.
The price of a natural gas futures contract is largely dependent on supply and demand. If there is more demand than supply, the price of a futures contract will rise. Conversely, if there is less demand than supply, the price of a natural gas futures contract will fall. Some of the key factors that influence supply and demand include stored natural gas reserves, world energy consumption, development of alternative fuels and weather conditions.
Another factor that influences the price of a natural gas futures is the cost of extraction. The US is the largest producer of natural gas in the world, and it is extracted through a technique known as hydraulic fracturing (fracking), where water and chemicals are used to fracture underground rock formations and release the gas. This technology is expensive, which can put pressure on the price of natural gas.
The best way to profit from the price of a natural gas futures trade is to follow a trend-following trading strategy. This means buying when the market is in an uptrend and selling when it is in a downtrend. If you are a day trader, you can also try range trading by identifying a minimum and maximum range for a security and buying when it hits the lower range support and selling when it touches the upper range resistance.
Trading Natural Gas Futures
Natural gas is used in many ways, ranging from fuelling vehicles (it has a lower carbon footprint than gasoline), heating homes and offices to boiling water and running air conditioning units. It’s a powerful source of energy, and its increased demand has attracted CFD traders who are looking to speculate on the price movement of the commodity.
Trading a commodity futures contract – which is an agreement to take or sell physical commodities at a specified date in the future for a specific price – requires the trader to put up a margin deposit, similar to a collateralised debt instrument, with their broker/clearing firm. This acts as a form of credit risk mitigation between the clearing firm, exchange and the trader, who has to close out their position at the end of each day in order to clear their margin account. At IG, we allow you to speculate on the price of these contracts without taking delivery of the underlying asset by trading them with our CFD service.
With our online platform, you can buy or sell contracts for the NYMEX Henry Hub natural gas futures – which settles at the physical trading point in Erath, Louisiana – 24 hours a day, Sunday to Friday. You can also trade the ICE natural gas and MCX contracts.
Like all futures contracts, the price of a natural gas contract is quoted in millions of British thermal units, or BTUs. The tick size for a futures contract is $0.001, and how much your position moves away from your entry price will determine your profit or loss.
Natural gas prices tend to move in a predictable way at certain times of the year. This may be due to the weather, or because of seasonality. It’s important to keep this in mind when you are developing your trading strategy, as it will help you to maximise your profits.
The price of a natural gas contract is usually volatile, but this volatility can provide you with exciting opportunities to profit. Whether you’re an experienced trader or just starting out, we can help you make the most of this highly liquid market with our wide range of educational materials and helpful tools, including the IG Academy trading app and Market Insights videos.
Conclusion:
Natural gas futures play a vital role in managing energy risk for participants in the energy market. As a highly volatile commodity that is affected by a wide range of supply and demand factors, natural gas can be a significant source of price risk for energy producers, consumers, and traders. By trading natural gas futures, participants can manage their exposure to natural gas price risk and hedge against potential price fluctuations. Natural gas futures also provide liquidity and transparency to the natural gas market, making it easier for participants to buy and sell natural gas at a fair price.
FAQs:
- What is energy risk?
Energy risk refers to the potential financial losses that can arise from fluctuations in energy prices or other factors that affect energy markets. Energy risk can affect energy producers, consumers, and traders who are exposed to energy price fluctuations.
- How can natural gas futures help manage energy risk?
Natural gas futures can help manage energy risk by allowing participants to lock in a predetermined price for natural gas at a future date. This can help energy producers, consumers, and traders manage their exposure to natural gas price fluctuations and reduce the potential financial losses from energy risk.
- What are some common hedging strategies for managing energy risk with natural gas futures?
Common hedging strategies for managing energy risk with natural gas futures include using futures contracts to lock in a price for future natural gas purchases or sales, using options contracts to limit downside risk while retaining upside potential, and using swaps to exchange cash flows based on the price of natural gas.
- Who can benefit from trading natural gas futures?
A wide range of participants in the energy market can benefit from trading natural gas futures, including energy producers, consumers, and traders. By managing their exposure to natural gas price risk, participants can reduce their financial losses and improve their overall profitability.
- What are some important factors to consider when trading natural gas futures?
Important factors to consider when trading natural gas futures include supply and demand factors, weather patterns, geopolitical events, economic data, storage levels, and regulatory changes. It is also important to develop a solid trading plan, practice risk management strategies, and stay up-to-date with industry news and events.
