How To Trade Natural Gas

Welcome to Trading Brokers step by step guide to trading natural gas online. Here you will find an easy to understand explanation of natural gas trading. This includes how to trade natural gas online, what you need to trade natural gas and how to open a trading account with a broker so that you can start trading natural gas online today.

Maybe you have heard of natural gas trading online or through a friend. Perhaps you are looking to trade and are curious about the different options available to you. Whether you are looking to speculate, invest or just learn more, this guide on how to trade natural gas can help you along your journey.

What is natural gas?

When talking about natural gas, we’re usually talking about a type of fossil fuel. These fossil fuels are made from the remains of plants and animals that were buried deep under the earth and were converted into natural energy resources thanks to millions of years of heat and pressure.

Unlike oil, which can be found in vast reservoirs beneath the earth’s surface, natural gas is often locked in rocks and sediment. To get it out, extraction companies will usually use a process known as hydraulic fracturing, or fracking, in which water, chemicals and sand are forced deep into the earth to drive the natural gas out.

There are other forms of non-fossil-fuel natural gases out there, such as biomethane which is a pipeline-quality gas that is biochemically made from organic materials from landfills, livestock, wastewater, and other sources. What we traditionally consider to be natural gas is not renewable, but there are some alternative forms of natural gas such as biomethane, that are renewable.

The most common form of natural gas on earth is methane. Methane and other natural gases such as ethane, propane, butane, and pentane are usually taken from both natural gas and crude oil wells. Each of these gases is chemically different from one another but they can all be used to create energy in certain circumstances.

Natural gas is mainly for industrial use and electric power. These two sectors consume roughly 69% of all the United States’ natural gas. 16% is used to power residential homes, while the rest is used for commercial ventures and transportation.

History of natural gas

Naturally occurring natural gas was discovered and identified in America way back in 1626, when French explorers discovered indigenous peoples igniting gases that were seeping into and around Lake Erie. In 1821, William Hart dug the first successful natural gas well in the U.S. in Fredonia, New York.

The first commercial natural gas transpired in Britain. Around 1785, the British used natural gas produced from coal to light houses and streets. In 1816, Baltimore, Maryland used this type of manufactured natural gas to become the first city in the United States to light its streets with gas.

In 1836, the City of Philadelphia created the first municipally owned natural gas distribution company. Today, the public gas systems in the United States of America number more than 900, with the Philadelphia Gas Works being the largest and longest operating public gas system in the USA.

Throughout the 19th century, natural gas was primarily used a source of light. However, in 1885, Robert Bunsen’s invented what is commonly known as the Bunsen burner. This invention opened plenty of more opportunities in which ways to use natural gas. After the building of the most effective pipelines in the 20th century, natural gas use was expanding to heating the home and cooking, appliances such as water heaters and oven ranges, manufacturing and processing plants, boilers to generate electricity and more.

Natural gas today

Natural gas is today a vital component of the world’s energy supply. It is estimated that natural gas currently supplies over one-half of the energy consumed by residential and commercial customers, with approximately 41% of the energy being used by the industry in the USA. Interestingly, around 99% of the natural gas that is consumed in the United States derives from North America. The popularity of natural gas has been maintained by its increased use in developing countries like China and Indonesia for the last decade or so.

Natural gas is considered to be one of the safest, cleanest, and most useful of all energy sources. Burning natural gas for energy results in fewer emissions of nearly all types of air pollutants and carbon dioxide (CO2) than burning coal or petroleum products to produce an equal amount of energy. Because natural gas is generally a clean burning fossil fuel, it has had a role to play in attempts to attain national goals of a cleaner environment, energy security and an economy that is more competitive.

What is natural gas trading?

Natural gas is one of the most commonly-traded commodities out there. Being highly volatile, it presents traders with an ample amount of opportunities. Natural gas trading is the buying and selling of the commodity with the goal of turning a profit.

How does natural gas trading work?

Henry Hub Natural Gas (NG) futures are the industry benchmark and they are traded through the Chicago Mercantile Exchange Group (CME Group). The name comes from the Henry Hub, which is a natural gas pipeline located in Erath, Louisiana, that serves as the official delivery location for futures contracts on the New York Mercantile Exchange (NYMEX). The hub is owned by Sabine Pipe Line LLC and has access to many of the major gas markets in the United States.

You can trade natural gas and natural gas-linked ETFs, online through various methods including spot markets, futures contracts, options contracts, spread bets and CFDs (contracts for differences).

Spot trading natural gas

Natural gas spot prices show what the cost of buying or selling natural gas right away is, hence the reference to “on the spot” rather than a set date in the future. On the other hand, futures prices show how much the markets have determined what they believe natural gas will be worth when the future expires.

Trading natural gas futures

The spot market is where financial instruments, including commodities such as natural gas, are traded for immediate delivery. Delivery is the exchange of cash for the financial instrument. A futures contract, is based on the delivery of the underlying asset at a future date, in which you agree to exchange an amount of natural gas at a set price on that date.

Natural gas futures are traded on exchanges and reflect the demand for the commodity. Natural gas futures are one of the more common methods of buying and selling natural gas online, as they enable retail traders to speculate on rising and falling prices without needing to physically own quantities of gas. Futures are also used by companies who want to lock in an advantageous natural gas price and to hedge against adverse price movements.

Trading natural gas stocks

Natural gas prices directly influence the value of natural gas company shares. One of the most popular ways of natural gas investing is to buy the leading gas company stocks. When choosing the best natural gas companies to invest in, you may wish to analyse the stock performance by checking out the company’s annual reports, giving consideration to revenue, net income, earnings per share, debt level and dividends they pay to investors. Some of the key natural gas market players at the moment include:

  • Exxon Mobil: ExxonMobil is one of the world’s largest publicly traded international oil and gas companies.
  • Chesapeake Energy: Chesapeake Energy Corporation is a company engaged in hydrocarbon exploration. It is headquartered in Oklahoma City, with an industry-leading portfolio of unconventional, onshore oil and natural gas assets in the U.S.
  • Occidental Petroleum: Occidental Petroleum Corp. engages in the exploration and production of oil and natural gas in the United States, the Middle East, Colombia, Canada and Chile.
  • Devon Energy: Devon Energy Corporation, an independent energy company, primarily engages in the exploration, development, and production of oil, natural gas, and natural gas liquids in the United States.
  • BP: BP plc (formerly The British Petroleum Company plc and BP Amoco plc) is a British multinational oil and gas company headquartered in London, United Kingdom with operations in Europe, North and South America, Australasia, Asia and Africa. The Company provides customers with fuel for transport, energy for heat and light, power for industry, and the petrochemicals products used to make everyday items such as paints, clothes and packaging.
  • Encana: Encana is one of the largest independent gas companies in the world, with operations mostly in the western United States and Canada, where it is based. The company has focused almost exclusively on gas.
  • ConocoPhillips: ConocoPhillips is a multinational corporation engaged in exploring, developing and producing crude oil and natural gas globally. It is based in the Energy Corridor district of Houston, Texas.
  • Southwestern Energy Company: Southwestern Energy Company is an independent energy company. The Company primarily focused on natural gas and crude oil exploration, development and production (E&P).
  • Chevron: Chevron Corporation is an American multinational energy corporation. One of the successor companies of Standard Oil, it is headquartered in San Ramon, California, and active in more than 180 countries. Chevron works to meet the world’s growing demand for energy by exploring for oil and natural gas; refining and marketing gasoline; producing chemicals and more.
  • Williams Energy: The Williams Companies, Inc., is an American energy company based in Tulsa, Oklahoma. Its core business is natural gas processing and transportation, with additional petroleum and electricity generation assets.
  • Gazprom: Gazprom is a global energy company focused on geological exploration, production, transportation, storage, processing and sales of gas, gas condensate and oil, sales of gas as a vehicle fuel, as well as generation and marketing of heat and electric power.
  • China National Petroleum: The China National Petroleum Corporation is a major national oil and gas corporation of China and one of the largest integrated energy groups in the world.
  • Total: Total is a broad energy company, which produces and markets fuels, natural gas and low-carbon electricity.
  • Royal Dutch Shell: The Royal Dutch Shell plc is a company based in the Netherlands that explores for crude oil and natural gas around the world, both in conventional fields and from sources, such as tight rock, shale and coal formations.
  • Equinor: Equinor is an energy company with more than 21,000 employees developing oil, gas, wind and solar energy in more than 30 countries.
  • Eni: Eni is an Italian energy company operating primarily in petroleum, natural gas, and petrochemicals. Established in 1953, it is one of Europe’s largest oil companies in terms of sales. Eni has operations in more than 70 countries. Its headquarters are in Rome.

Trading natural gas options

A natural gas option is similar in some ways to a futures contract although there is no obligation to trade if you decide that you don’t want to. Instead, natural gas options give you the right to buy or sell an amount of natural gas at a pre-agreed price on a pre-agreed expiry date. However, you do not have to exercise the option.

There are two types of options: calls and puts. If a trader was under the opinion that the market price of natural gas was going to increase, they may consider buying a call option. If on the other hand, the trader thought that natural gas prices were going to fall, they may want to buy a put option.

It is worth noting that traders can also sell call and put options, if they wanted to take the opposing positions. It is of course important to be careful as you could lose should the market move against you.

An option is at-the-money when the strike price equals or is very close to the price of the underlying natural gas swap. An option is considered in-the-money when the price of the underlying swap is above a call’s strike price, or when the price of the underlying swap is below a put’s strike price.

Natural Gas option contracts are available for trading at New York Mercantile Exchange (NYMEX). NYMEX Natural Gas option prices are quoted in dollars and cents per mmBtu and their underlying futures are traded in lots of 10000 mmBtus of natural gas.

Trade natural gas ETFs

A natural gas ETF (exchange-traded fund) invests in natural gas futures contracts or other investment products, in an effort to closely track the market price of natural gas. These funds may also invest in heating oil, crude oil, and gasoline futures.

Natural gas ETFs (exchange-traded funds) can combine the stocks of natural gas companies and natural gas futures into one single fund, which saves traders the hassle of picking individual natural gas stocks and looking for the best performers.

CFD natural gas trading

CFD financial instruments allow traders to speculate on both rising and falling prices without actually owning the underlying asset which is natural gas in this case. This can be more convenient for some traders and means that there is no need for storing or securing physical quantities of gas.

Traders would open long (buy) positions, if they think the price of natural gas will rise or short (sell) positions if they thought that the natural gas price will fall. The difference in price between the entry and exit price is the traders realised profit or loss, excluding any broker commission and fees.

The majority of brokers who offer natural gas CFD trading will provide access to leverage which enables a trader to control a larger position size with a small deposit. For example, an account balance of $2,000 with 1:3 leverage, could theoretically take a position size of $6,000. Whilst this can increase profit potential, it also significantly increases risks and the potential loss from a trade. Therefore, it is imperative traders have a clear understanding of how leverage works and the risks involved.

Many online brokers provide natural gas trading. You can see a selection of our best brokers below with whom you can open a trading account to buy and sell natural gas online.

Broker
Rating
Regulated
Min. Deposit
Founded
Max. Leverage
1.

ASIC, BVI, CBI, FFAJ, FSA, FSCA

Min $100 Deposit

2006

1:400

Review Trade! Trade!
Terms & conditions apply
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
2.

FCA, CFTC, NFA, BaFin, FINMA, ASIC, FMA, MAS, FSA, FSCA, DFSA, JFSA, METI, MAFF

Min $250 Deposit

1974

1:200

Review Trade! Trade!
Terms & conditions apply
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
3.

ASIC, CySEC, IFSC, DFSA

Min $5 Deposit

2009

1:888

Review Trade! Trade!
Terms & conditions apply
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78.28% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
4.

ASIC, CySEC, FSA

Min $200 Deposit

2007

1:500

Review Trade! Trade!
Terms & conditions apply
Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
5.

ASIC, FCA, DFSA, SCB, CySEC, BaFin, CMA

Min $200 Deposit

2010

1:500

Review Trade! Trade!
Terms & conditions apply
CFDs and FX are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Types of natural gas

There are two basic types of natural gas. The characteristics that separate wet from dry are technically dependent on the “thermal maturity” of the rock formation.

Natural gas is known as being dry or wet, with dry gas being more thermally mature and consisting primarily of methane, whereas wet gas is less thermally mature and may contain “natural gas liquids” including ethane, butane, propane, and pentane. These natural gas liquids need to be separated from the methane to ensure the natural gas sent to consumers has a consistent BTU content. Wet gas is currently considered to be more valuable in the marketplace as the natural gas liquids have inherent value as a commodity.

What moves natural gas prices?

The price of natural gas mainly changes according to the supply and demand. There is a vast range of factors that can have an impact on the supply and demand of natural gas. Some of the key factors that impact the supply and demand of natural gas include:

When there is a high demand for natural gas that is greater than its supply, the price of natural gas will likely rise. On the contrary, if the demand of natural gas falls and supply increases in the market, the price of natural gas will likely fall. Increases in prices tend to encourage natural gas production and imports, and sales from natural gas storage inventories. Declining prices tend to have the opposite effects.

Because there are limited short-term alternatives to natural gas as a fuel for heating and electricity generation during periods of high demand, changes in supply or demand over a short period may result in large price changes. Prices themselves often act to balance supply and demand.

Factors on the supply-side that can have an impact on prices include natural gas production, net imports, and storage inventory levels. Factors on the demand-side include weather (temperatures), economic conditions, petroleum prices and the price of alternative forms of energy. Cold weather (low temperatures) increases demand for heating, while hot weather (high temperatures) increases demand for cooling, which increases natural gas demand by electric power plants.

Economic conditions can influence the demand for natural gas, especially by manufacturers. Demand may be moderated by petroleum fuel prices, which may be an economical substitute for natural gas for power generators, manufacturers, and large building owners.

Natural gas traders will often use economic news releases such as gross domestic product (GDP) and employment figures to anticipate the direction of natural gas prices.

Why trade natural gas?

Natural gas is one of the world economy’s main energy sources, making it a very popular commodity to trade. A naturally occurring fossil fuel, can be used as a source of energy for heating, cooking, and electricity generation. It is also used as a fuel for vehicles and as a chemical feedstock in the manufacture of plastics and other commercially important organic chemicals. It is highly demanded, traded in volume, and extremely liquid. Natural gas trading can therefore deliver competitive trading conditions along with clear chart patterns, and high volatility.

Traders may choose to trade natural gas as way to try and earn profit by speculating on natural gas prices. For instance, when trading natural gas CFDs you can speculate on prices without actually needing to physically own natural gas. This makes it a convenient trading method for anyone who has a trading account with an online broker. Companies may also trade natural gas to lock in natural gas prices and hedge against adverse price movements.

How to trade natural gas online?

If you have taken the time to read through the above, you should hopefully have an understanding of how to trade natural gas. Here is a summary of the key steps:

1. Decide if natural gas trading is for you

Trading natural gas online carries an element of risk and can take more time than other forms of investing. You will need to research the natural gas market, manage your positions, follow market news and decide how to react to it. It is important to understand the risks and dedication that comes with trading natural gas online.

2. Educate yourself

Before trading natural gas, it is imperative to learn as much as possible about investing and trading online. Any mistake could prove to be costly. There is an abundance of free educational materials provided by many online natural gas brokers that can help you to improve your trading skills and knowledge.

Most natural gas brokerages will also provide a free demo trading account so that you can practice trading natural gas online with virtual funds in order to familiarise yourself with the trading platforms and practice your trading strategies until you feel confident enough to open a real trading account.

3. Choose a natural gas broker

In order to trade natural gas online, you will need a broker account and trading platform to execute your trade positions through to the market. When choosing a broker, there are a few important things to consider such as regulation, commission fees, platforms, tools, education, funding options and customer support.

If you do not have the time to research brokers, you can see a list of our best brokers that we have already prepared to help traders. If you would like to know more, you can also view our detailed guide on how to choose a trading broker.

4. Research the natural gas market

If you have made it this far then you may be ready to start trading natural gas online! The next step is to research the oil market to help increase your knowledge. The best brokers should have this information conveniently displayed for you within their trading platform.

5. Have a trading plan

Some of the most important factors that can help determine natural gas trading performance can be the trading plan and discipline. It is important to have a solid trading plan personalised to your own needs that includes the money management and trading strategy that you will use. Most experts and professional traders would try to not let negative emotions such as fear, anger and greed affect their trading strategy.

6. Buy and sell natural gas

Once you feel ready to trade natural gas online, you can analyse the market to help decide if and when you will place your trades. After placing a trade on natural gas, you will need to keep track of how it performs and manage it according to your trading plan. Some investors will keep hold of natural gas trades for the long-term, whereas traders may buy and sell oil on a daily basis.

Is natural gas trading right for me?

Natural gas trading is a popular choice for long-term investors and active traders. It can be suitable for scalping, day trading and swing trading. Traders who would usually trade forex, trade stocks, trade indices, trade commodities, trade cryptocurrency, may look to diversify their portfolio.

However, it is important to understand the significant risks involved with trading natural gas online, especially when using leveraged positions. Most experts would suggest trading on a demo account with virtual funds to begin with.

This can be a useful way to familiarise yourself with how to trade natural gas and using trading platforms whilst allowing you to practice your trading strategies until you feel confident and produce consistent results. Most natural gas brokers provide unlimited demo accounts free of charge.