- Factors affecting the price of natural gas
- 1. Storage
- 2. Demand for natural gas globally
- 3. Cheaper and better alternatives
- 4. Weather
- Top 5 largest natural gas producers
- Basic ways to trade natural gas
- 1. Futures contracts
- 2. Options
- 3. Contracts for difference (CFDs)
- Strategies to apply in natural gas trading
- 1. Day trading strategies
- 2. Range trading strategies
- 3. Breakout strategies
- How to start trading natural gas?
Natural gas, one of the best and cleanest fossil fuels, is commonly used in households and industries to generate power. Its volatility puts it at the forefront among many assets you can invest in and earn extra income. Let us see the factors that can affect the price of natural gas, how to trade it, and what strategies to apply, including futures trading.
Factors affecting the price of natural gas
The price of natural gas is always influenced by supply and demand, just like every other commodity in the market. If the production of natural gas is high, it means supply will be high, and its price will decrease. On the other hand, if production is low, supply will not meet demand, and prices will increase.
Understanding the factors influencing the demand and supply of natural gas will help you make a competent analysis and correct forecast. Let’s look at some of them in detail.
Countries that produce natural gas usually store it in large reservoirs when its demand is lower, especially during summer. Demand increases in winter, causing supply to be high; hence an increase in the price of this product is during this season and vice versa in summer.
So, storage availability helps stabilize the market by providing a buffer for fluctuations in demand and supply, which reduces price volatility and ensures a consistent supply.
2. Demand for natural gas globally
Natural gas is becoming the most common source of energy in most households, industries, and machinery, among others. According to analysts, this commodity’s demand will increase by almost 2% per year, especially in Asian economies.
So, this positive uptake of natural gas makes it a trading commodity worth thinking about.
3. Cheaper and better alternatives
As time goes by, the global population is developing an interest in greener and more renewable energy sources because they are economical compared to natural gas. Statistics have it that consumption of these renewable energy sources has steadily increased from 2017 to 2023, as shown in the chart above. Hence, this can affect the demand for natural gas, which will definitively change its price.
Extreme weather conditions such as cold snaps or heat waves can increase the demand for natural gas for heating or cooling – this will, in turn, put upward pressure on its prices. Conversely, mild weather conditions can reduce demand for natural gas and have a downward effect on prices.
On the supply side, severe weather conditions can disrupt production, transportation, and storage, which will reduce supply and drive up prices. For example, hurricanes and other natural disasters can damage production facilities, pipelines, and storage tanks, leading to reduced supply, hence higher prices.
Top 5 largest natural gas producers
You need to have an inventory of the lead countries in natural gas production and consumption to make a good analysis when trading this asset.
Extracting natural gas requires advanced technology due to its storage nature between rocks and sediments. The extraction process is known as fracking, and the US leads in it by producing the most significant amounts of natural gas worldwide. Russia, Iran, China, and Qatar follow it in the list of the top 5 largest gas producers in 2022, as per Statista data:
|Amount in cubic meters (m3)
Basic ways to trade natural gas
You can trade natural gas using several ways. The main ones are:
1. Futures contracts
A futures contract is the most common method of trading natural gas. It is a standardized contract to purchase or sell commodities at a specific date in the future.
Note! Big companies use futures contracts to hedge their exposure in the natural gas market; hence, understanding hedging strategies is vital when trading this volatile commodity.
An option is a type of contract that gives the holder the right, but not the obligation, to buy or sell natural gas at a predetermined price within a specified time frame. Traders use these contracts for speculation most time. You can buy a call option if you think the price will rise or sell a put option if you want to take advantage of a fall in price.
3. Contracts for difference (CFDs)
A CFD is associated with an agreement between a buyer and a seller to exchange the price difference of commodities and other assets between the opening and closing dates of a contract. You can speculate on the price movement of natural gas going short or long and benefiting a fall or rise in the market.
Strategies to apply in natural gas trading
There are hundreds of techniques you can use when trading natural gas. For ease of understanding, let’s group them all into three categories.
1. Day trading strategies
Day trading is among the most applied strategy not only in natural gas (NG) but other assets too, due to its simplicity and ability to generate profits within a short time (if applied correctly). It involves opening a trade and closing it within the same day.
You can use several techniques, but the most common is trend following. If the candlesticks on your chart have consistently higher highs (uptrend), buy the natural gas. Sell it once you notice lower lows (downtrend).
2. Range trading strategies
To use them, you should take advantage of the defined support and resistance levels as well as identify a price range that the natural gas has been trading in. Place trades at both the upper and lower boundaries of the range and then profit from the price action that remains within the defined range. To put it simply, buy at support levels and sell when the chart shows resistance levels.
Range trading works best in markets with low volatility and limited price movement such that it does not show a particular trend; hence it is one of the best for natural gas trading. It may be used in both bullish and bearish market conditions.
3. Breakout strategies
Breakout trading lies in identifying support and resistance levels and entering a trade when the commodity price breaks through one of them. You will need to identify key levels where the price has frequently stopped rising (resistance) or falling (support) and then choose a suitable stop loss to mitigate possible losses. You will also need to select a reasonable take profit to help you lock in profits after selling the asset when it reaches a certain price.
When the price of natural gas breaks through a level of resistance or support, enter a trade in the direction of the breakout. Also, ensure that you keep an eye on the market, adjust the stop loss and take profit levels as necessary.
Note! For most beginners, breakout trading is not the best strategy. False breakouts will result in losses, and corrections are often confusing, especially given the vast array of potential ranges available for trading.
How to start trading natural gas?
If you are ready to trade natural gas, kindly follow these steps to begin your journey:
- Open a trading account with your preferred broker. The process may not take more than a day, and you will be free to trade after depositing the required amount.
- Develop an approach to trading that includes entry and exit rules, and risk management, among others.
- Use technical or/and fundamental analysis to increase the correctness of your forecasts.
- Open a trade once you are sure about the price movement of natural gas.
Note! To become a professional trader in natural gas or any other asset, you must develop your own strategies and constantly adjust them to the market situation.
Natural gas is a commodity that is gaining popularity worldwide. Investing in it can bring significant amounts of additional income. However, it is important to remember that trading is a risky activity, and you may lose your capital. You can minimize the risk by learning more about natural gas trading strategies from PDF files, such as: