Natural gas is one of the most volatile commodities in the energy market. Its price volatility attracts speculators who seek to profit from large price movements.
A futures contract is a standardized legal agreement to buy or sell a commodity at a predetermined price in the future. Natural gas futures are traded on the NYMEX and ICE exchanges. Each futures contract holds 10,000 million British Thermal Units (BTU) of gas.
Natural gas is an energy commodity used to power homes, generate electricity and fuel vehicles. As a natural resource, it requires a significant investment to produce and distribute. Because of this, natural gas prices are vulnerable to price volatility caused by supply and demand concerns. Trading in natural gas futures contracts grew out of the need to control those price fluctuations and manage risk.
A futures contract is an agreement to buy or sell a specific quantity of a commodity at a predetermined date in the future for a predetermined price. Futures contracts are traded on an exchange, such as the New York Mercantile Exchange (NYMEX), Intercontinental Exchange (ICE) or Multi Commodity Exchange of India (MCX). Futures are a leveraged instrument; therefore traders must place margin collateral with their broker commensurate to the value of their futures contract position.
Unlike oil futures, which are tied to crude oil prices, natural gas prices can be affected by other factors. For example, a rise in economic activity can cause a demand for natural gas that may drive up prices. In addition, weather conditions can influence prices. A severe winter, for instance, can increase the use of heating in homes and limit production.
Like other commodities, natural gas has a seasonal pattern that investors should take into account when trading. During the winter, from November to February, prices tend to rise due to higher demand for heating and electricity. In contrast, summer temperatures and air conditioning usage often push natural gas prices lower.
To stay up to date on news and events that may affect natural gas prices, traders should follow the US Energy Information Administration (EIA). The agency releases weekly storage and inventory reports that can induce price volatility. The CFTC’s weekly Commitment of Traders report is another important source of information for natural gas traders. The report shows a breakdown of the number of futures contracts held by commercial, non-commercial and non-reportable traders. This data can provide insights into the overall market sentiment that may influence futures prices. These reports are released every Tuesday.
Buying a Futures Contract
Natural gas is an important energy resource used to heat homes and businesses. It is an affordable and clean fuel and can be transported easily from oil fields to homes via pipelines. Its popularity has prompted many investors to trade its prices. Unlike physical energy, which must be stored and transported, futures contracts give investors the ability to participate in the market without owning any physical products.
A futures contract is an agreement to buy or sell a commodity at a specified price, in the case of natural gas it is 10,000 million British thermal units (mmBtu). The trading price fluctuates daily based on global supply and demand.
Because the commodity is traded on exchanges, there are many participants in the marketplace including producers like shale oil drillers and end users like power plants. The price is also influenced by seasonality as the winter chill drives heating demands up while summer air conditioning usage spikes.
The price of a futures contract is quoted in increments called ticks. Each tick represents a change in the price of one million BTUs. The more the price changes from your entry price, the greater your profit or loss. Your trading platform will display your profits and losses in terms of “ticks,” so it is important to understand this concept before you start trading.
Investors can buy natural gas futures directly from the CME Group’s New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE). The contract specifications are found on each exchange’s website. To buy a natural gas futures contract you must deposit initial margin with your clearing broker or exchange. The amount deposited is not similar to margin requirements in stock/equity trading, instead it acts as a performance bond to mitigate credit risk for the clearing firms, exchanges and customers.
To maximize the benefits of trading, it is advisable to purchase multiple futures contracts that expire at various times throughout the year. This is known as a “futures strip.” A futures strip includes 12 monthly contracts that are connected together to form an overall annual price forecast. This helps traders to avoid rolling over their trades each time a shorter-term futures contract expires. Rolling over a trade results in additional trading costs and potentially negative cash flows if the next futures contract is more expensive than the current one (contango).
Selling a Futures Contract
Natural gas is an abundant, convenient energy source. It is piped directly from oil fields into homes across the country and is used to heat buildings and run air conditioning. It is also used to generate electricity and as a fuel for vehicles. Natural gas prices are driven by weather patterns as well as global tensions, and are impacted by the daily production and storage of the commodity.
The underlying commodity for the natural gas futures contract is 10,000 million British thermal units of natural gas (mmBtu). Trading is conducted on the New York Mercantile Exchange’s Henry Hub market center in Erath, Louisiana, which serves as the nexus of pipelines that carry gas to markets across the U.S. and Canada. One natural gas contract represents a delivery month; trading of any futures contract terminates three business days prior to the first calendar day of the contract’s delivery month, unless the Exchange determines otherwise.
Traders use natural gas contracts to manage price risks related to their natural gas production and consumption. Producers can short hedge to lock in a selling price for the natural gas they produce and consumers can long hedge to secure a purchasing price for their natural gas consumption.
A small percentage of natural gas futures contracts result in physical delivery of the underlying commodity; most are settled for cash through exchanges and brokers. For those futures contracts that do result in physical deliveries, the commodity is delivered to a storage facility owned by the buyer or an agreed-upon third party. The cost to transport and store the commodity is reflected in the price paid for the futures contract.
Like all commodities, traders buy and sell natural gas futures for both hedging and speculative purposes. Both buyers and sellers of futures are required to post margin for each position held at the time of trade. To learn more about margin requirements for each contract, visit our Commodity Futures Margin Requirements web page. To see the margin required to trade each contract, please select the contract you wish to trade from the drop-down box and click on the Details tab.
Natural gas is used in a wide range of utilities, from powering homes to fuelling vehicles. It’s a commodity that is widely traded and can be a lucrative investment for large speculators or extraction companies who hedge their exposure to future prices. However, like any other market, it can also be volatile and you can lose money just as easily as you can make it.
One of the most common ways to trade this commodity is via futures contracts, which are agreements between traders to exchange a standardized amount of the asset at a specified date in the future at an agreed price. These are a staple for big natural gas producers or utility companies who buy vast amounts of the commodity, but seasoned investors and speculators can also trade them. Once a contract expires, the trader will either take physical delivery of the commodity or settle their position in cash.
A standard natural gas futures contract is worth 10,000 million British thermal units (mmBtu), which makes up one lot. The majority of the trading on this commodity takes place at the Henry Hub in Louisiana, USA, which acts as the industry’s pricing benchmark. All the prices quoted on this market are based on these prices.
Traders who trade futures can use a variety of strategies, including technical indicators, fundamental analysis and chart patterns to determine whether they should buy or sell. They can also look at long-term trends in the global economy to see how they might affect demand and supply for this energy source.
While there are many factors that can influence the price of natural gas, one of the most significant influences is weather conditions. For example, colder temperatures can lead to increased demand for heating, which puts pressure on the price of the commodity. In addition, the production of natural gas can be affected by a variety of factors such as rig counts and the weather.
Traders can also speculate on the market price of natural gas by buying or selling CFDs, which are derivative instruments that give you the right to trade the underlying asset without actually owning it. You can open a live account to start trading today and practise your strategy in a risk-free demo account.
Natural gas futures are becoming increasingly popular due to a number of factors, including the growing demand for natural gas as a cleaner alternative to other fossil fuels, the volatility of natural gas prices, and the ease of trading natural gas futures contracts on electronic platforms. As more traders and investors seek exposure to the natural gas market, natural gas futures offer a way to participate in this market without the need for physical delivery.
- Can I trade natural gas futures on any exchange?
No, natural gas futures are traded on specific exchanges, such as the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE).
- How can I access natural gas futures?
You can access natural gas futures through a futures broker or through an online trading platform that offers access to natural gas futures.
- What are the advantages of trading natural gas futures?
The advantages of trading natural gas futures include the ability to speculate on price movements, the opportunity to hedge against price risk, and the ability to participate in the natural gas market without the need for physical delivery.
- What factors can affect the price of natural gas futures?
The price of natural gas futures can be affected by a variety of factors, including weather patterns, supply and demand, geopolitical events, economic data, and storage levels.
- What risks are associated with trading natural gas futures?
Trading natural gas futures carries a number of risks, including market risk, liquidity risk, and operational risk. It is important to understand these risks and have a solid trading plan in place before trading natural gas futures.