Natural gas accounts for nearly a quarter of United States energy consumption. The NYMEX Division natural gas futures contract is a widely used national benchmark price.
Traders closely watch weekly storage and inventory reports in order to anticipate demand and market volatility. They also keep an eye on weather patterns and global tensions.
Basics
Natural gas is a fossil fuel and a vital energy source that powers homes, business, industries and even vehicles. It accounts for over 25% of US energy use and up to 1/3rd of global energy consumption. It is a commodity that is heavily traded on the futures markets. Natural gas futures trading is highly seasonal and can experience significant price volatility. As such, it is important to understand the fundamentals of this market before investing.
The most common way to trade natural gas is through a CFD or derivative instrument that provides leverage. The main underlying asset of a CFD is the natural gas futures contract. The futures contract is based on the Henry Hub natural gas reference price, which is 10,000 million British thermal units (mmBtu). The hub is a nexus of natural gas pipelines in Erath, Louisiana that connects the eastern U.S. to the Gulf Coast and Midwest.
Traders of natural gas CFDs profit from daily price fluctuations in the commodity, speculating on whether its value will rise, fall or stay the same. Unlike physical commodities, which have actual expiration dates and involve physical delivery, futures contracts are only traded on an exchange. This means that they can be traded 24 hours a day, Sunday through Friday.
When analyzing the price of a natural gas futures contract, it is important to consider demand and supply levels. Demand is driven by weather situations, and is especially sensitive to cold temperatures. A spike in demand can drive up prices due to the need to heat homes and businesses, while a decrease in demand can drive prices lower because of reduced heating costs.
To assess supply, traders must follow the production numbers of major American energy companies. This is done by tracking the rig count and capital expenditures, which directly impact the amount of gas produced each month. Traders also monitor weekly storage and inventory reports from the Energy Information Administration, an independent agency of the United States Department of Energy. Often, new information in these reports will trigger price volatility, as it can vary widely from expectations.
Trading
Natural gas is used in a variety of ways including heating homes and power generation. It is also a raw material for some industrial chemicals. As a result, it is one of the most actively traded commodities on the market.
A contract for natural gas futures obligates the buyer to take delivery of a fixed quantity of the commodity on an agreed-upon date in the future. The contracts are traded on the New York Mercantile Exchange (NYMEX) and other major commodities exchanges such as the Intercontinental Exchange (ICE) and Multi Commodity Exchange of India (MCX). Each contract is worth 10,000 Million British Thermal Units (MMBTU). Traders can buy or sell the contract depending on their assessment of the value of the asset at its expiration date.
There are a number of reasons why traders choose to trade natural gas futures. Speculation is one, but there are other advantages such as inflation hedges and portfolio diversification. The futures market is also a great way for producers and distributors to manage price risks.
The NYMEX provides a wide range of tools to help traders make informed decisions. Its website features a comprehensive list of technical indicators and news events that could impact the price of a particular contract. In addition, the exchange offers a wide range of educational resources and webinars.
A key factor that affects natural gas prices is the weather. Demand usually rises in the winter when people use the gas to heat their homes. Colder temperatures also limit production, which in turn pushes prices higher. Other factors that influence natural gas prices include the rig count of energy companies and the capital expenditures of oil and gas producers.
In addition to analyzing the fundamentals, traders can also use technical analysis to predict whether the price of a specific natural gas futures contract will go up or down. In order to do this, they must understand the different trading strategies that are available to them. These include range trading, breakout trading and trend trading.
The price of a natural gas futures contract is based on the current spot price of the commodity in Louisiana, USA at the Henry Hub. This is the industry’s pricing benchmark and all contracts in the underlying market are priced off this index. The NYMEX division of the ICE publishes a daily Natural Gas Summary Report, which includes the latest spot price for each futures contract. The report also lists the current open interest and breakdown of long and short positions by delivery month.
Margin requirements
The prices of natural gas can move wildly due to seasonality, weather conditions and global events that can affect production, consumption or supply. The price of competing fuel based energy sources also has a significant impact on natural gas pricing. The futures market is a place to speculate or hedge on these movements and lock in profitable prices for later trading. The most popular natural gas contract is the Henry Hub Natural Gas (NG) traded through NYMEX, owned by CME Group.
The term “margin” in commodity trading refers to the amount of money you need to have in your account to trade a single contract. This differs from margin in stock/equity trading as it is determined by the exchange that lists the commodity you are interested in. To learn more about current margin requirements visit our Margin Requirements Web page.
When trading outright futures contracts, you are not required to take physical delivery of the underlying asset. Only a small percentage of the contracts that expire do result in delivery, and most trades are closed prior to expiration solely for the purpose of avoiding taking or making delivery of the commodity.
However, you can still make a profit or loss from trading the underlying asset by opening long or short positions in the physical market, but you would need to do so through a different type of investment vehicle. This option is known as a fixed forward, or a fixed price physical contract and it can be traded in both the US and global markets.
The NG fixed forward market is very similar to the futures market and it allows consumers to agree to purchase or sell physical natural gas at a predetermined date in the future, and for a fixed price. In a fixed forward transaction, both parties enter into a firm agreement to purchase or sell a specific quantity of natural gas for a particular month, at a price agreed upon in the front-month contract. The underlying asset is delivered through a physical delivery point, with the Henry Hub in Erath, Louisiana being the most prominent one in North America.
Options
Natural gas is one of the most important forms of energy in the world and accounts for a third of all global energy consumption. It is a source of heat and electricity for homes, factories and power plants. It can be obtained by digging up underground deposits or extracting it through a process called hydraulic fracturing (fracking).
The natural gas futures market is influenced by supply and demand fundamentals. Unlike crude oil, which is used in transportation and heating, natural gas is mostly consumed domestically in the United States. Because of this, its price is more dependent on local economic conditions than global factors. For example, an economic recession can lower natural gas demand and push prices down.
On the supply side, the US Energy Information Administration publishes weekly reports that show natural gas inventory levels and production changes. These reports influence supply and production levels in the United States and can lead to volatility in the market.
There are also seasonal factors that can influence natural gas prices. For example, demand increases in the winter when the temperatures are colder and people need to use more heating. As a result, the price of natural gas can rise significantly in these months.
Traders can place directional bets on the direction of the price by buying or selling options. More complex strategies can be constructed by purchasing and selling options simultaneously, known as spreads.
Schwab offers the ability to trade Henry Hub Natural Gas futures contracts through our Futures Trading Center nearly 24 hours a day, 6 days a week. In addition to these futures, we offer NYMEX-listed crude oil (CL), heating oil (HO) and unleaded gasoline (RB) futures. Our futures trading centers give you access to competitive per contract pricing plus specialized tools, research and support. Start trading today.
Conclusion:
Trading natural gas futures on an exchange offers numerous benefits for participants in the energy market. Some of the key benefits include access to a liquid and transparent market, efficient price discovery, lower transaction costs, and reduced counterparty risk. By trading natural gas futures on an exchange, participants can benefit from greater flexibility and transparency in their energy trading activities.
FAQs:
- What is a natural gas futures exchange?
A natural gas futures exchange is a platform where participants can buy or sell natural gas futures contracts. These exchanges facilitate trading by providing a centralized marketplace where buyers and sellers can come together to execute transactions.
- What are some benefits of trading natural gas futures on an exchange?
Some benefits of trading natural gas futures on an exchange include access to a liquid and transparent market, efficient price discovery, lower transaction costs, and reduced counterparty risk. Exchange trading also offers greater flexibility and transparency, as participants can easily access real-time market data and execute trades in real-time.
- How does exchange trading offer greater liquidity and transparency?
Exchange trading offers greater liquidity and transparency because it provides a centralized marketplace where buyers and sellers can come together to execute transactions. This creates a more efficient market where prices are determined through the forces of supply and demand. Additionally, exchange trading provides real-time market data that can help participants make informed trading decisions.
- How does exchange trading reduce counterparty risk?
Exchange trading reduces counterparty risk by providing a clearinghouse that acts as an intermediary between buyers and sellers. When a trade is executed on an exchange, the clearinghouse becomes the counterparty to both the buyer and seller. This means that participants do not have to worry about the creditworthiness of their counterparties.
- How can trading natural gas futures on an exchange improve trading efficiency?
Trading natural gas futures on an exchange can improve trading efficiency by providing access to a centralized marketplace where participants can easily execute trades. This can help reduce transaction costs and improve execution speed. Additionally, exchange trading provides access to a range of trading tools and technologies that can help participants make more informed trading decisions.
