Natural gas is an abundant energy source used to generate electricity and heat homes. Its demand peaks with winter heating needs and summer air conditioning usage.
Schwab offers futures trading on this commodity, with contracts that trade every month from January through December. Take advantage of competitive per contract pricing plus specialized tools, research and education.
What is a natural gas futures contract?
A natural gas futures contract is a legal agreement to buy or sell a commodity at a specific time in the future. Unlike trading physical commodities, where you are required to take possession of the underlying asset, you do not have to own a single molecule of natural gas in order to trade futures contracts on IG’s platforms. Rather, the profits and losses of your trades are calculated as margin calls and reflected in your account, with no physical ownership or transfer of the underlying asset taking place.
Traders can choose to either go long (buy) or short (sell) a natural gas futures contract. The most common and standardized contracts to trade are those that are listed on the New York Mercantile Exchange (NYMEX) and settle in million British thermal units (mmBtu). A million BTUs is roughly the amount of energy required to change the temperature of one cubic foot of water by 1 degree Fahrenheit.
When a futures contract is bought, the buyer agrees to purchase a fixed number of mmBtu on an agreed date in the future for a set price. Traders can use these futures contracts to hedge against the volatility of prices or make speculative trades on the market.
Like most commodities, the price of natural gas can fluctuate on a daily basis. Whether due to weather, supply concerns or political events, these movements can have a profound impact on the market’s valuation. It is for this reason that the potential for profit from a trader’s understanding of the fundamental factors that influence a natural gas market can be so significant.
In addition to the NYMEX-listed Henry Hub natural gas futures contract, Schwab offers other energy commodities such as heating oil and unleaded gasoline (RB) through our futures platform. You can find competitive per-contract pricing plus specialized tools, research and education to help you understand the market. These commodities are available to trade 24 hours a day, Sunday through Friday.
How does a natural gas futures contract work?
Natural gas is a fossil fuel used for heating homes and also has many industrial applications. Traders buy and sell natural gas futures to hedge their commodity price risk. Often producers will employ a short hedge to lock in a selling price for the gas they produce and consumers can use a long hedge to lock in a buying price for the natural gas they need.
A natural gas futures contract is a legal agreement between two parties to buy or sell physical natural gas at a specified future date and price. The contract specifies the volume, delivery location(s), and a time frame, e.g., a year. Each contract has its own ticker and contract value. The ticker indicates which exchange a contract is traded on, such as the NYMEX or ICE. The contract value is based on the price of natural gas at Henry Hub in Erath, LA, which is considered a national and international benchmark price.
In order to trade a natural gas futures contract, you must first open an account with a futures broker. You will then be assigned a margin requirement for each commodity you plan on trading. This is not the same as the margin requirements in stock/equity trading and is meant to protect the clearing firms, exchanges, and customers from any potential losses on your commodity positions.
Each natural gas futures contract is 10,000 million British thermal units (mmBtu), and traders will transact in whole numbers of contracts, known as “lots.” The tick size for a natural gas futures contract is $10. This means that if the price of a contract moves by one tick, you will gain or lose $10.
The supply and demand for natural gas is very seasonal. In the summer, people cool their homes using air conditioning, and this drives demand for the energy. Meanwhile, during the winter, people warm their homes with natural gas heating systems and this drives demand for the energy as well. To balance this seasonality, the United States stores natural gas in underground reservoirs for consumption in the summer and winter months.
How can I trade natural gas futures?
Trading natural gas futures is a great way to speculate on the price of this vital energy source. Unlike oil, natural gas is used in everyday energy applications such as heating homes and offices, boiling water for cooking and bathing, and powering air conditioning units. Traders profit from daily price fluctuations, as global supply and demand for this commodity drives prices up or down.
Speculating on the price of natural gas involves analyzing trends, using technical or fundamental analysis to determine where the market may be headed, and opening your trade when the opportunity presents itself. To begin trading, open a live account and choose the commodity futures contract you wish to trade (natural gas is traded under the ticker symbol “NG”). A futures contract obligates the seller to deliver a specific quantity of natural gas at a specified future date for a price.
Each futures contract is priced in million British thermal units (BTUs) – one BTU is the amount of energy required to raise the temperature of one pound of water by 1 degree Fahrenheit. Like all commodities, natural gas is measured in increments called “ticks”. A tick size for a futures contract represents the minimum movement in price per unit. The tick size for a natural gas futures contract is $10, meaning that for every one dollar movement in price, the trader wins or loses $10.
As with all futures contracts, margin requirements are set by the exchanges and differ between individual commodities. To view the current margin requirement for a particular commodity, visit the Margin Requirements page on our website.
In addition to futures, e360 Power offers a wide range of tradable options on the CME. A natural gas option gives its purchaser the right to buy or sell a futures contract at a predetermined price by a specific expiration date. Options are bought and sold for both hedging and speculation purposes, and they offer investors significant leverage compared to the underlying price of the futures contract they’re based on.
Many savvy end users of natural gas use both futures and options to hedge the risk of rising prices for this essential energy resource. If you have questions about incorporating natural gas into your trading strategy, reach out to a trader at e360 Power.
What are the risks of trading natural gas futures?
Natural gas is a highly volatile commodity. Prices can rise and fall quickly, especially during winter when temperatures can drop to sub-zero levels. Prices can also be affected by the wider energy and oil markets as well as political events like OPEC’s decision to maintain production in November 2014, which sent crude prices to a new low of just above $70 per barrel.
The price of physical natural gas is primarily determined by the market at Louisiana’s Henry Hub where all futures contracts traded on the US Mercantile Exchange are priced relative to this benchmark. The price of the commodity is also influenced by seasonality, which means that natural gas prices tend to move in a predictable way at certain times of the year.
For example, the winter months are when the most significant changes in pricing occur because natural gas demand for heating purposes is at its peak. On the other hand, summer and autumn are when demand for cooling purposes is at its lowest.
In addition to seasonality, the market is also prone to price volatility due to supply and demand fundamentals that can affect the underlying commodity itself. For example, the Energy Information Administration (EIA), an independent department of the United States Department of Energy, publishes weekly storage and inventory reports that are a key driver of this market.
When these types of announcements are made, the market can experience sudden and rapid price movements that can cause speculators to lose money. In order to avoid this, traders are encouraged to always keep a close eye on the news and not let their emotions get the better of them.
Traders can trade both the CFD for Natural Gas (NG) and the physical contract on the US Mercantile Exchange (NGX). The main difference between the two products is that futures have expiry dates and may involve physical delivery, whereas CFDs are not subject to this and can be traded indefinitely. You can find natural gas charts on your trading platform if it provides them or you can use a third-party charting service like TradingView.
Conclusion:
Analyzing natural gas futures market trends is an important part of trading in the energy market. To analyze market trends, participants can use a variety of tools and techniques, including technical analysis, fundamental analysis, and market news and events. By staying up-to-date on market trends and developments, participants can make informed trading decisions and improve their chances of success in natural gas futures trading.
FAQs:
- What is technical analysis and how is it used to analyze natural gas futures market trends?
Technical analysis is a method of analyzing financial markets by using charts and statistical indicators to identify trends and patterns in price movements. Technical analysts use a variety of tools and techniques, including trend lines, moving averages, and momentum indicators, to identify potential trading opportunities and make informed trading decisions.
- What is fundamental analysis and how is it used to analyze natural gas futures market trends?
Fundamental analysis is a method of analyzing financial markets by looking at the underlying economic and financial factors that drive market movements. In the case of natural gas futures trading, fundamental analysts may look at supply and demand dynamics, geopolitical events, weather patterns, storage levels, and regulatory changes, among other factors, to identify potential trading opportunities and make informed trading decisions.
- How can market news and events be used to analyze natural gas futures market trends?
Market news and events can have a significant impact on natural gas futures market trends. For example, changes in government regulations or production levels can affect supply and demand dynamics, while shifts in weather patterns can impact natural gas demand for heating and cooling. By staying up-to-date on industry news and events, participants can identify potential trading opportunities and make informed trading decisions.
- What are some key indicators to watch when analyzing natural gas futures market trends?
Some key indicators to watch when analyzing natural gas futures market trends include natural gas storage levels, weather patterns, economic data such as gross domestic product (GDP) and consumer price index (CPI), production levels, and government regulations. By monitoring these indicators, participants can gain insight into supply and demand dynamics and make informed trading decisions.
- How can risk management strategies be incorporated into natural gas futures market trend analysis?
Risk management strategies, such as setting stop-loss orders or using options contracts, can be incorporated into natural gas futures market trend analysis to help protect against potential losses. By setting predetermined exit points and limiting exposure to market volatility, participants can manage risk and improve their chances of success in natural gas futures trading.
