Natural gas is a type of fossil fuel that is found beneath the Earth’s surface. It’s known as one of the cleanest, safest, and the most useful energy commodities due to lower emission of nearly all types of air pollutants and carbon dioxide (CO2).
Natural Gas is the third best traded commodity by volume after crude oil in the world. Natural gas used to generate electricity, heats homes and fuels vehicles.
In this article, you will learn where natural gas is used, what are the factors that can influence natural gas prices, and how natural gas is traded in India and around the world.
Where natural gas is used?
The US is the biggest natural gas producer followed by Russia.
As per the Statistical Review of World Energy 2023, top 10 Natural Gas producing countries are the US, Russia, Iran, China, Canada, Qatar, Australia, Norway, Saudi Arabia, Algeria and Turkmenistan.
Natural gas is used across the world. Based on the same report, the top 10 consuming countries are the US, Russia, China, Iran, Canada, Saudi Arabia, Japan, Germany, United Kingdom and UAE.
The world’s largest consumer of natural gas is the United States.
Natural gas is used for heating homes and operating appliances such as water heaters, ovens, and cooktops. It’s also used to fuel vehicles in compressed (or CNG) form, and used in manufacturing and processing plants, in boilers to generating electricity
Factors that can influence natural gas price
Like any other commodity, natural gas prices fluctuate primarily by supply and demand.
Prices of energy commodities such as crude oil and natural gas can be very volatile due to numerous factors that can have an impact on their supply and demand levels.
Here is a list of major factors which can influence supply and demand of natural gas prices.
- Inventory status of natural gas.
- Weather conditions of the US and other natural gas producing countries.
- Crude Oil Prices
- Global Demand
- Demand and Supply in the US
- Development of alternative power
- Prices of other energy commodities
- Government regulations
How natural gas is traded around the world?
Trading happens on exchanges or OTC.
Exchanges are subject to financial and market regulation, due to which it is very transparent. Exchanges are popular as it allows all market participants to trade.
OTC stands for Over The Counter. OTC basically consists of a network of buyers, sellers and brokers.
In the OTC market, trading in various securities takes place via a broker-dealer network.
When a company does not meet the requirements of getting listed in stock exchanges, they prefer their stocks to be traded in the OTC market.
In general, the OTC market is considered as risky compared to exchanges.
Commodities like natural gas and crude oil are traded on an exchange or speculated on using derivative contracts.
We have few different ways to trade natural gas. The most popular are future contracts, options, contracts for difference (CFD), via stocks and ETFs.
Natural gas Futures contracts
The most preferred way traders take positions in natural gas is by buying or selling future contracts. Most popular is the Henry Hub natural gas futures contract.
Henry Hub natural gas futures contract is traded on the New York Mercantile Exchange (NYMEX), the world’s largest commodity futures exchange.
NYMEX is part of Chicago Mercantile Exchange Group (CME Group).
Henry Hub Natural Gas (NYMEX:NG) futures are referred to as the industry benchmark for trading around the world.
The Henry Hub is a distribution centre of natural gas pipeline in the Henry hamlet of Erath, Louisiana.
The Henry Hub Pipeline is connected to four domestic pipelines and nine international ones. The pipeline has a great influence on the price of natural gas futures.
One of the most common ways traders use to trade natural gas is by taking a position in Henry Hub natural gas futures contract, which is traded on the CME.
As per the future contracts, traders agree to the delivery of a certain amount of natural gas at a specified date in the future for a predetermined price.
A future contract for natural gas can also be traded on the Multi Commodity Exchange (MCX) or Intercontinental Exchange ( ICE ). MCX and ICE are based out of India and the United Kingdom, respectively.
Natural gas options
Apart from future contracts, one can also use call options and put options to speculate on the price of natural gas.
Natural gas options are exercised into future contracts that represent natural gas contracted for delivery.
Both the call and put option give traders the right but not the obligation to buy or sell an underlying asset before a certain expiry date.
Traders prefer to buy call options if they think the price of natural gas is going to rise. They buy a put option if they think the market price will fall.
CFD – Contract from Difference
The third option to trade in natural gas is through “contract from difference (CFD)”.
In CFD, traders speculate on the price movements of natural gas without taking any physical ownership.
CFD is an agreement between the trader and CFD broker in which the trader agrees to exchange the difference in price of a financial product between the time the contract opens and closes.
In this case, the trader or investor never owns the underlying asset but instead receives revenue based on the price change of that asset.
If the asset value rises he receives profit. If asset value decreases, then he receives a loss.
CFD is an effective hedge technique. By using CFD you can benefit from falling as well as rising markets as it allows you to go short or long.
Trading in CFDs is not allowed in the US and India. Many countries like the UK, Germany, Singapore, Spain, France, Australia, South Africa and Canada allow trading in CFDs.
Stocks of natural gas companies
Many investors instead of taking positions in futures and options of natural gas, prefer to invest in shares of gas sector companies.
Investing in natural gas stocks means you are holding equity shares of companies involved in the gas sector. It’s not a simple business that anyone can do. It requires capex and expertise to be an exporter or producer of natural gas. We have big players in this business.
Apart from stocks, we have ETFs to invest in. We have ETFs that hold natural gas stocks or futures. Natural gas ETFs allow you to get exposure to a basket of assets from a single financial instrument.
Top Natural gas companies in the world
Here is a list of top Natural Gas companies in the world;
- Gazprom: It’s a Russian multinational energy corporation headquartered in the Lakhta Center in Saint Petersburg, Russia. It’s the largest publicly listed natural gas company in the world and largest producer of natural gas in Russia.
- PetroChina: It is currently Asia’s largest oil and natural gas producer. Headquartered in Dongcheng District, Beijing.
- Sinopec: It’s a Hong Kong listed Chinese oil and natural gas enterprise based in Chaoyang District, Beijing.
- ExxonMobil: It’s an American multinational oil and gas corporation headquartered near the Houston suburb of Spring, Texas.
- BP: It’s a British multinational oil and natural gas company headquartered in London, England.
- Chevron: It’s an American multinational energy corporation predominantly specialising in oil and gas, headquartered in San Ramon, California.
- Royal Dutch Shell: It’s a British multinational oil and natural gas company headquartered in London.
- Total Energies: It’s a French multinational integrated energy and petroleum company having its head office in La Défense district in Courbevoie, west of Paris.
- Rosneft: Operates in all of Russia’s major oil and natural gas provinces including Western and Eastern Siberia
- Lukoil: It’s a Russian multinational energy corporation headquartered in Moscow. It specialises in the business of extraction, production, transport, and sale of petroleum, natural gas, petroleum products, and electricity.
- Tatneft: It’s a Russian oil and gas company with headquarters in the city of Almetyevsk, Republic of Tatarstan, Russian Federation.
How natural gas is traded on MCX, India?
In India, commodities are traded on the Multi Commodity Exchange of India Ltd (MCX). Financial instruments like Natural Gas Futures are offered on the MCX platform.
Apart from Natural gas, major commodities like CRUDE OIL, GOLD, SILVER, ALUMINIUM, COPPER, COTTON, KAPAS, ZINC and NICKEL are available for trading in futures segments on MCX.
Natural gas (MCX:NATURALGAS) is traded 5 days a week (i.e. Mondays to Friday) from 09.00 am to 11.30 pm.
Instead of 11.30, trading on natural gas will be closed at 11.55 pm based on the US daylight saving time period.
Here are certain additional details to help you understand trading of natural gas on MCX;
- Contract Duration: Maximum of 3 months, at any point of time 3 calendar months will be available for trading.
- Trading Unit: 1250 mmBtu
- Quotation/ Base Value: Rs. per mmBtu
- Maximum Order Size: 60,000 mmBtu
- Tick Size (minimum price movement): 10 paise (0.10 rupees)
In natural gas we have two different contracts: Natural Gas Mini (Symbol: NATGASMINI) and Natural Gas (Symbol: NATURALGAS)
Natural Gas Mini is traded with 250 MMBtu trading unit. Whereas for NATURALGAS, the trading unit is 1250 mmBtu. Due to smaller trading units, retail traders prefer to trade in NATGASMINI.
Traders are allowed to participate in both futures and options markets of natural gas.
The futures contract trades on MCX are in units of 10,000 million British thermal units (MMBtu).
MMBtu is an acronym for Metric Million British Thermal Unit. MMBtu is a unit traditionally used to measure natural gas and other heat content or energy value.
One BTU means the amount of energy required to change one pound of water by one degree Fahrenheit.
How natural gas is settled on the MCX
Due date rate shall be the settlement price, in Indian rupees, of the New York Mercantile Exchange’s (NYMEX) Natural Gas (NG) front month contract on the last trading day of the MCX Natural Gas contract.
NYMEX is a market division of Chicago Mercantile Exchange Inc. (“CME Group”).
The last available RBI USD/INR currency reference rate will be used for the conversion to Indian rupees. The price so arrived will be rounded off to the nearest tick.
For example, on the day of expiry, if NYMEX Natural Gas (NG) front month contract settlement price is $2.260 per mmBtu and the last available RBI USDINR reference rate is 66.1105, then DDR for MCX Natural Gas contract would be Rs. 149.40 per mmBtu (i.e. $2.260 * 66.1105 and rounded off to the nearest tick.).
The contract would be settled in cash.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
