During times of price inflation, commodities and their futures contracts become more valuable. Commodities are seen as a hedge against stocks and other assets because they have inelastic demand. For this reason, a competent approach to investment management and knowledge of how to trade natural gas futures can be very profitable.
What Are Natural Gas Futures?
Natural gas is used to generate electricity and produce heat. It is sent through pipelines, or liquified and transported by boat. Though natural gas is a physical commodity, you luckily do not need to take physical ownership of it in order to trade it. Trading natural gas can be done through natural gas futures contracts. A futures contract is a standardized legal contract to buy or sell something at a predetermined price at a specified time in the future. Through trading these contracts, investors can turn a profit without ever interacting with the underlying commodity.
What Are the Most Common Natural Gas Futures?
Natural gas futures trading often occurs on the New York Mercantile Exchange (NYMEX) or the Intercontinental Exchange (ICE). The size of one natural gas futures contract is 10,000 million British Thermal Units (mmBTU). This is known as “one lot”, and traders will transact in whole numbers of “lots.” Most who trade natural gas futures use standardized contracts called Henry Hub natural gas futures contracts. Henry Hub is a natural gas pipeline located in Erath, Louisiana which connects four intrastate and nine interstate pipelines. Because of its size and reach, the Henry Hub pipeline is the pricing point for natural gas futures on NYMEX. Furthermore, settlement prices at Henry Hub are used as benchmarks for the entire North American natural gas market. Other gas hubs are National Balancing Point (NBP) in the United Kingdom, Dutch Title Transfer Facility (TTF) in the Netherlands.
What Are Natural Gas Futures Contract Specifications?
Contract specifications are the terms through which a contract is traded. Natural gas contract specs include:
1. Contract size: The contract size for natural gas is 10,000 mmBTUs (million British thermal units). This is also known as “one lot”.
2. Contract months: Natural gas contracts can trade during all months of the calendar year.
3. Ticker symbol: A natural gas futures ticker is composed of three parts:
- “NG” (which denotes the commodity is natural gas)
- The delivery month (expressed as one letter)
- The delivery year
4. Deliverable grades: This is the minimum quality of the commodity that is to be delivered under the contract. Deliverable grades are determined by pipeline specifications in effect at the time of delivery.
5. Trading hours: NYMEX futures trading takes place between 9 a.m. and 1:30 p.m. Eastern time. ICE trading takes place between 9:30 a.m. and 4:00 pm Eastern time.
6. Last trading day: Trading for a particular contract terminates three business days before the first calendar day of the contract’s delivery month.
7. Tick size: Futures contracts have minimum price fluctuations known as “ticks”. Movement in price is measured in ticks. The natural gas futures tick size is $10.
What Should I Know about Natural Gas Futures Trading?
Before starting to trade futures, it’s important to have a quantifiable plan in place and to never let emotions cause impulsivity. A plan should be formed by thoroughly researching both the natural gas market and various trading strategies. Below are a few of the trading strategies used today:
- Day trading is a form of speculation in which a trader buys and sells an instrument within the same day so that all positions are closed before the market closes.
- Range trading involves identifying a consistent minimum/maximum range where a security trades for an extended period. Day traders will often use the trading range of the first 30 minutes of a day as a reference for their intraday strategies, buying the low and selling the high.
- Breakout trading involves identifying important data points which will trigger a trade if the price moves through it.
- Trend trading involves looking for securities that are already trending up or down, then following that trend to make a profit.
What Are the Factors that Affect Natural Gas Price?
It’s important to remember the price of natural gas is heavily affected by the fundamentals of supply and demand. The following factors influence the supply and demand of natural gas:
Storage
- A country stores up natural gas in underground reserves through the summer months to withdraw it to produce heat during the cold winter. Greater storage means more supply, which will put less stress on prices.
Weather
- While mild temperatures do not require much air conditioning, both hot and cold temperatures put more stress on the thermostat. This requires more electricity, which will drive up the demand for natural gas. For this same reason, it’s also important to remember that the demand for gas is very seasonal.
Production
- It’s important to monitor the production levels of the main American energy companies – their rig counts, capital expenditures, etc. - because this directly impacts supply.
How Have Natural Gas Futures Performed in 2022?
Investors who regularly trade natural gas futures saw a year-to-date rise of over 150% since the beginning of 2022. Though there have certainly been short-term volatility in any given week or month, the long-term gains have been undeniable.
How Can e360 Power Help with Gas Futures Trading?
The traders at e360 Power incorporate volatility into their trading strategies and hedge prudently. As niche energy specialists, they produce profits even while the rest of the commodity markets are struggling. To see where natural gas futures contracts fit into your portfolio, get in touch with an e360 Power expert.
