How To Trade Natural Gas: Tools and Approaches

FXOpen

Natural gas trading presents unique opportunities due to its critical role in the global energy market and its inherent volatility. This article delves into the various strategies and tools traders can use to navigate natural gas CFDs, from fundamental and technical analysis to understanding market dynamics.

Overview of the Natural Gas Market

Made up of primarily methane, natural gas is a key fossil fuel that’s grown in use over the past two decades. It forms deep beneath the Earth's surface from the remains of plants and animals buried under layers of sediment and subjected to intense heat and pressure over millions of years. It’s typically found near oil reserves and must be extracted and processed before it can be used.

Natural gas is a relatively clean-burning energy source, at least compared to coal or oil. It plays a crucial role in the global energy sector, accounting for about 23% of energy consumption worldwide in 2023, according to Statista, and 33% of US energy consumption in 2022, according to the EIA.

It’s also highly versatile, used across various sectors. For instance, in 2022, natural gas provided approximately 38% of the energy consumed by the US electric power sector (EIA), making it a primary source for electricity generation. The industrial sector also accounted for around 32% of natural gas consumption, using it as both a fuel and a raw material for producing chemicals, fertilisers, and hydrogen.

Natural gas is also essential for residential and commercial heating, particularly in colder regions. Moreover, the transportation sector adopts natural gas, particularly in the form of compressed natural gas (CNG) and liquefied natural gas (LNG), to reduce emissions and costs.

Market Structure and Participants

The natural gas market consists of various key players, including producers, consumers, and traders. Major producing countries include the United States, Russia, and Qatar. According to the EIA, the US led the world in LNG exports in 2023, averaging 11.9 billion cubic feet per day​. Natural gas production involves extraction, processing, and transportation to end-users via extensive pipeline networks and LNG shipping routes.

The supply chain for natural gas begins with extraction from reservoirs, followed by processing to remove impurities and liquids. The processed gas is then transported through pipelines or converted into LNG for shipping to international markets. Once delivered, it is distributed to consumers for the various applications described.

Key participants in the natural gas market include multinational energy companies (e.g., ExxonMobil, Gazprom), regional producers, and numerous traders who facilitate the buying and selling of natural gas on commodity exchanges. These players operate within a complex regulatory framework that varies by country, influencing production levels, prices, and market dynamics​.

Key Factors Influencing Natural Gas Prices

Let’s now take a closer look at the factors driving natural gas prices.

Supply and Demand Dynamics

The balance of supply and demand is a fundamental driver of natural gas prices. On the supply side, production levels play a crucial role. As with many commodities, higher production, in this case driven by advancements in extraction technologies like hydraulic fracturing, typically leads to lower prices.

Storage levels also impact prices; high storage volumes, or inventories, can cushion against supply disruptions, keeping prices relatively stable. Conversely, low storage levels can lead to price spikes.

Consumption patterns are equally important; industrial usage, residential heating, and electricity generation are primary demand drivers. Additionally, the cost of extraction, including technological and labour costs, feeds into the overall pricing of natural gas​.

Geopolitical Events and Policies

Geopolitical stability and regulatory policies significantly affect natural gas prices. For example, the substantial 2022 reduction of Russian gas exports to Europe caused record price increases due to severe supply constraints​​.

Trade policies, such as tariffs and export restrictions, also impact prices. The US has seen a notable rise in LNG exports in recent years and become a major supplier of natural gas to Europe. Recent policy decisions aimed at energy security and diversification, especially in Europe and Asia, have led to increased demand for non-Russian natural gas, affecting global prices​.

Weather Patterns and Seasonal Variations

Weather significantly affects natural gas demand and supply. Cold winters increase demand for heating, often leading to higher prices, while mild winters can reduce demand and depress prices. Similarly, hot summers boost demand for electricity to power air conditioning, influencing prices. Natural disasters like hurricanes can disrupt production and transportation infrastructure, causing supply shortages and price spikes​.

Natural Gas Trading Instruments

When it comes to actually trading gas, there are a few instruments traders use.

Contracts for Difference (CFDs)

CFDs are a popular instrument for trading natural gas due to their flexibility and leverage. A CFD is a derivative that allows traders to speculate on the price movements of natural gas without owning the physical commodity. Traders can go long (buy) if they anticipate price increases or short (sell) if they expect prices to fall. They are the most popular choice for anyone looking to be a natural gas trader. The CFD natural gas symbol is XNGUSD. You can trade US natural gas CFDs in FXOpen’s TickTrader trading platform.

One of the main advantages of CFDs is leverage, which allows traders to control a large position with a relatively small amount of capital, potentially enhancing returns but also increasing risk​​. Additionally, CFDs offer access to the natural gas market with lower upfront costs and the convenience of trading on various platforms without the need for storage or delivery logistics​.

Futures Contracts

Natural gas futures are standardised contracts traded on exchanges such as the New York Mercantile Exchange (NYMEX). These contracts obligate the buyer to purchase a specific amount of natural gas at a predetermined price on a future date.

Futures are widely used by producers and consumers to hedge against price volatility and by speculators seeking to take advantage of price movements​. While natural gas futures are suitable for some traders, their complexity and potential obligation to take delivery may deter those simply looking to speculate on the market’s price movements.

Options Contracts

Options on natural gas futures provide the right, but not the obligation, to buy or sell futures contracts at a set price before the option's expiration. These can be used to hedge positions in the natural gas market or to speculate with limited risk. Options strategies can range from simple calls and puts to more complex combinations like spreads and straddles, but are also highly complicated and require a strong understanding of how options work.

Exchange-Traded Funds (ETFs)

ETFs allow investors to gain exposure to natural gas prices without trading futures or options directly. These funds track the price of natural gas or the performance of natural gas companies. ETFs are generally used by investors to diversify their portfolios and participate in the natural gas market with lower complexity compared to futures and options​.

What to Know Before Trading Natural Gas

Before trading natural gas, it’s important to consider the following key aspects:

  • Trading Units: Natural gas is typically traded in units of million British thermal units (MMBtu).
  • Trading Hours: Natural gas trading hours are specific, with futures trading on the NYMEX from 6:00 PM to 5:00 PM ET, Sunday through Friday. Ensure you know the trading schedule of your platform before getting started. Both CFD US natural gas and forex pairs can be traded on FXOpen’s TickTrader platform on a 24/5 basis.
  • Volatility: Natural gas prices are highly volatile, often more so than currency pairs and many other commodities. Be prepared for significant price swings.
  • Spreads: The relatively wide spread of natural gas, or the difference between the bid and ask price, can lead to higher trading costs.
  • Leverage and Margin: Trading natural gas, especially through CFDs, involves leverage, which can amplify both gains and losses. Ensure you understand margin requirements and risk management strategies​ before getting started.

Key Strategies for Trading Natural Gas CFDs

Trading natural gas CFDs can be a lucrative endeavour, but it requires a solid understanding of the market and effective natural gas trading strategies.

Fundamental Analysis

Fundamental analysis focuses on the economic factors that influence natural gas prices. Key elements include supply and demand dynamics, inventory levels, and macroeconomic indicators. For instance, the US Energy Information Administration (EIA) releases weekly reports on natural gas storage levels, which provide insights into supply and demand balance. High inventory levels generally indicate lower prices, while low inventory can signal higher prices due to anticipated supply constraints​.

Economic growth and industrial demand also play significant roles; as industries expand, natural gas consumption typically rises, driving prices higher​. Moreover, expectations of colder-than-normal winters increase demand for heating, driving prices up, while mild winters can suppress demand. Lastly, geopolitical events, such as conflicts in gas-producing regions, can disrupt supply chains and cause price volatility.

Technical Analysis

While fundamental analysis helps determine the market outlook, technical analysis is often used by traders to find entry and exit points.

Key principles like support and resistance levels, trend identification, and breakout strategies still apply in natural gas markets. However, price volatility may make some established technical strategies less effective. It’s key to test different indicators and patterns to find what works best.

Momentum indicators, such as the Stochastic indicator or Moving Average Convergence Divergence (MACD); trend tools, like the Average Directional Index (ADX) and moving averages; and volume-based tools, such as the VWAP and Fixed Range Volume Profile (FRVP), can all assist in analysing and trading natural gas CFDs.

In practice, a fundamental-first approach may look like a trader monitoring inventory reports, economic growth, and weather patterns to gain an idea of the market’s direction. They might then use technical analysis signals to time trades and find precise entry and exit points.

Sentiment and Positioning Analysis

Sentiment analysis involves gauging the overall market mood, which can significantly influence natural gas prices. While there is no single unified measure of natural gas trading sentiment, tools such as Investing.com’s Natural Gas Scoreboard can offer a quick look at how traders view the market. Market positioning can be identified using the Commitment of Traders (COT) report, which shows the positions of different market participants in natural gas futures contracts.

Generally speaking, bullish sentiment and positioning might drive prices up, while the opposite sentiment can push prices down. However, traders should also note that sentiment and positioning can indicate overreactions, creating opportunities for contrarian strategies​.

Tools for Trading Natural Gas

There are several tools that traders can use to analyse and trade natural gas. For instance:

1. Trading Platforms

  • TradingView: Offers comprehensive charting tools and real-time market data.
  • MetaTrader 4/5: Provides advanced trading and analysis tools widely used by traders.
  • TickTrader: FXOpen’s own TickTrader features an advanced charting platform with more than 1,200 trading tools.

You can trade at any of these platforms with FXOpen.

2. Inventory and Storage Reports

  • EIA's Natural Gas Weekly Update: Offers comprehensive analysis of markets, including supply, demand, and price trends.
  • EIA’s Natural Gas Weekly Storage Report: Features a snapshot of the US supply of natural gas across different regions.

3. Sentiment and Positioning

  • CFTC's Commitments of Traders (COT) Report: Provides insights into market positioning by different trader categories.
  • Investing.com’s Natural Gas Scoreboard: Indicates the bullish or bearish sentiment surrounding natural gas.

4. Market Reports

  • American Gas Association (AGA) Reports: Provides detailed analysis and statistics on markets.

5. Weather Forecasts

  • AccuWeather or Weather Underground: Accurate weather forecasts are essential as they significantly impact natural gas demand.
  • National Oceanic and Atmospheric Administration (NOAA): Offers long-term climate predictions.

6. News Websites

  • Bloomberg
  • Reuters
  • MarketWatch
  • CNBC

7. News Aggregators and Economic Calendars

  • Energy EXCH
  • FinancialJuice

The Bottom Line

Trading natural gas can be an interesting endeavour with the right strategies and tools. By understanding market dynamics and leveraging advanced platforms, traders can navigate this volatile market effectively. Open an FXOpen account to access a robust trading platform and start trading natural gas CFDs today, maximising your trading potential with professional tools and support.

FAQs

Where Can I Trade Natural Gas?

You can trade natural gas through brokers that offer CFDs, such as FXOpen. These platforms allow you to speculate on live prices without owning the physical commodity. FXOpen provides a natural gas trading platform via TickTrader, known for its user-friendly interface and access to a wide range of trading tools and resources​.

How to Trade Natural Gas?

Trading natural gas can be done through various methods, including CFDs, futures, options, and ETFs. CFDs are most popular for retail traders due to their lower capital requirements and leverage options.

How to Buy Natural Gas Futures?

To buy natural gas futures, you need to open an account with a broker that offers futures trading, such as CME Group. After funding your account, you can trade futures contracts, which are standardised agreements to buy or sell natural gas at a specific price on a future date.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

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