Natural Gas Trading: How to Trade Natural Gas?: Options, Futures, Derivatives & Commodity Trading

Natural Gas Trading: How to Trade Natural Gas?

Details, training and tutorials about how to trade Natural Gas, driving factors behind natural gas price movements, risks involved in natural gas trading and some historical case studies for natural gas trading

What is Natural Gas and what is Natural Gas Trading?

Natural Gas is hydrocarbon gas mixture usually found in deep rooted rock and coal beds inside the earth, plus within the petroleum sources. It is used as a energy source for heat as well as electricity and finds usage in vehicle fuel, domestic heating, power generation, fertilizers production, etc. 

For trading purposes, it is classified as an important energy commodity - see Commodity Classification. Among primary energy commodities, Natural Gas is the only non-petroleum commodity hence provides a perfect alternative to oil as a source of energy. That is the reason why there is so much interest in natural gas trading. 

What differentiates Oil And Natural Gas from a traders perspective?

We all are aware that oil (Crude Oil) is a much more liquid commodity to trade among all commodities. So what is the difference between oil and Nature gas when it comes to trading these two nergy commodities? 

The main difference are the underlying parameters which determine the prices of Crude oil and natural gas. 

Crude oil prices move more on speculation as well as currency fluctuations. Oil price may also rise or fall as that may be used as a hedging instrument for forex trading by some traders. Apart from supply and demand, the production, marketing, storage, transportation, available infrastructure and logistics and similar functions related to oil business also drives the crude oil prices. Hence Crude oil prices follow a very multi-factored parameters which may determine the oil prices. In a nutshell, determining oil prices through a standard method is not simple.

That's where Natural Gas trading offers somewhat simple method for price determination, as the factors responsible for it are not that varied. However, this should be understood with caution before any trading decisions are made.

What determines the Natural Gas Prices for Trading it as commodity?

Primarily, Natural Gas prices are driven by simple demand and supply. It's use it limited to a few specific regions, so there is limited interest in natural gas trading. Mainly, its the inventories data (expectations and deviations) which drive the natural gas trading prices in short term. For the long term, its the other factors like development of alternate energy sources, development of increased efficiency in using Natural Gas and so on which may drive the prices. 

How to determine Natural Gas Prices?

On a day to day basis (other than pure speculation), a known method for Natural Gas price determination is based upon the inventory reports which are published on a weekly basis about how much Natural Gas Inventory is there and what is the deviation from the predicted values. These reports are published by US Energy Information Administration on their site on a weekly basis and is available to all without any charges (i.e. no paid subscription required). Here is the link to the page where updated reports can be found Weekly Natural Gas Inventory Report from US EIA.

How is Natural Gas measured?

Being a gaseous commodity, Natural Gas is measured in terms of billions of cubic feet in the inventories report. This is indicated by Bcf.

So all the figures reported in the EIA report on Natural Gas inventory, the mentioned figures are in bcf. Traders and investors trading on natural gas will usually focus on the "change" figures. If the Natural gas inventory change is positive, then it indicates more supply and hence drop in demand so the prices are expected to go down. If the inventory change is negative, then it indicates less supply hence more demand therefore prices of Natural gases are expected to go up. 

So the higher the variation in change, the more volatility is expected in the prices in either direction. 

The page also provides details about historical comparison of similar data. At the time of writing this article, the table had the following data:

Another factor in determining the prices of Natural Gas futures trading is the estimates provided by various market analysts about their predictions on Natural Gas inventories and how much their predictions vary when the actual data is reported. 

Like any other stock prediction, the commodity traders / brokers also make predictions about natural gas inventories. All those predictions data is polled to arrive on a average figure about future inventory (and change in inventory). People bet their trades on these estimates. 

So if the actual inventory data reported comes out to be near the estimated average, the natural gas futures prices are expected to remain stable. If there are major deviations, then price volatility is expected

Let's head onto next part: Natural Gas Historical Prices
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