Natural gas is a powerful energy source, and its seasonal volatility has caught the attention of CFD traders. With Plus500 you can trade this commodity without having to purchase the underlying asset.
Traded on the NYMEX, ICE and MCX in the U.K and India, natural gas futures are known for their volatility. The main price drivers are weather patterns and global tensions.
Supply and Demand
A natural gas future is a contract to buy or sell a certain amount of the commodity at a specified price at a later date. Its price is determined by factors including supply and demand, production, storage capacity, and other considerations. Like other commodities, natural gas prices rise and fall depending on these factors. For example, if production is higher than the perceived or actual demand for it, prices will decline. However, when the reverse is true, prices will increase.
The demand for natural gas is usually driven by the weather, as people use more of it to heat their homes and businesses in colder months. This demand is also influenced by economic growth, the availability of other energy sources, and the cost of transporting it.
In addition, natural gas producers invest a lot of money up-front to prospect for and extract the commodity. As a result, they need to know their selling price so that they can cover the costs of production and make a profit. This is why they often sign up for contracts with a distributor or another company to sell their product at a specific price at a later date.
These contracts are traded on the New York Mercantile Exchange (NYMEX) and other exchanges around the world, such as the Intercontinental Exchange (ICE) and Multi Commodity Exchange of India (MCX). They have a ticker symbol that identifies the type of natural gas they’re trading and the price per million British thermal units (BTUs) that they’re priced at. For example, a contract with the ticker NGK15 @ 2.76 will be for natural gas at the Henry Hub in Louisiana.
Traders can use charts to track the movement of natural gas futures prices and develop trading strategies. For example, some traders may look for price patterns, such as a rising trend, and then take advantage of that pattern to buy or sell at the right time. Other traders may focus on the fundamentals, such as a change in production or storage levels, and then combine it with technical indicators to determine whether they should be long or short.
Seasonal Variations
Unlike oil, which is tied to complex geopolitical factors, natural gas prices are more affected by the weather and daily routines of people. This makes it harder to predict when and how much demand for this commodity will rise or fall, but the market’s seasonality does play a major role in influencing prices.
In the United States, the amount of natural gas in storage is usually low at the beginning of the withdrawal season in November and December. This is because the winter is when the highest amount of demand for the commodity arises, due to heating needs. As a result, the price of natural gas tends to climb as the withdrawal season approaches.
This trend is reflected in the Henry Hub, the most important benchmark for US natural gas prices. The value of the hub is determined by the total volume of gas in storage at a point, and it is then divided by the weekly flow rate of gas into and out of storage. A higher reading is bullish, and a lower reading is bearish.
A higher reading would indicate that more gas is being added to storage than is being consumed, which could be a sign of oversupply and push down prices. A lower reading would be a negative indication, as it means that the current supply of gas is below the 5-year average and could cause prices to rise.
Another factor that influences the movement of the Henry Hub is the seasonality of US natural gas production. The amount of gas produced in the summer is generally lower than other times of the year, as producers focus on completing projects and making plans for the future. As the summer turns to autumn, however, the amount of gas in storage begins to decline, which is bullish for the market.
As the winter season approached last year, the low level of storage combined with cold weather forecasts and early demand pushed the price of natural gas to an all-time high in the spot market and nearby futures contracts. The price then dropped, but as the winter withdrawal season approaches, it appears that this time around, the market is in a better position to take advantage of its seasonality and may be poised for a strong price rise.
Margin Requirements
As with all investments, speculating in the natural gas market should be done carefully and only with money that you can afford to lose. Trading in futures contracts involves a promise to buy or sell an asset at a specified date in the future, and is designed for people who are looking to hedge their exposure to price movements or profit from them.
Natural gas is one of the most widely traded commodities in the world and is considered to be a critical part of the United States’ energy infrastructure. It accounts for around a quarter of the country’s total energy consumption and is produced in all regions of the US, with the majority coming from shale deposits. The most popular contract for trading natural gas is the Henry Hub Natural Gas Futures, which is traded on the NYMEX division of the Chicago Mercantile Exchange (CME Group).
In order to take advantage of potential price changes in the NG market you can purchase (go long) a futures contract by depositing an initial margin. This amount is determined by the underlying product’s risk profile and the current market conditions.
You are also required to maintain a minimum maintenance margin in your account. This is a percentage of the open position’s total value that the broker will set as its minimum requirement. If the futures contract price moves in your favor, you will make a profit and this will increase your account balance. However, if the contract price moves against you, you will incur a loss and your maintenance margin will need to be increased accordingly.
As the demand for natural gas rises, so will the price of its futures contracts. This is why traders must keep in mind that there needs to be a matching of supply and demand in order for prices to stay stable or even move lower over the longer term.
As a result of the rising margin requirements, activity in the LNG and European gas markets has cooled as traders are unable to cover their positions with sufficient funds. This has sucked liquidity out of the market and may continue to do so for some time as margin requirements increase further.
Trading Options
As with any commodity, the price of natural gas is driven by supply and demand. If there is a greater demand for natural gas than there is supply, the price will rise. Conversely, if supply is greater than demand, the price will fall. As a result, there is often volatility in the market for natural gas.
Traders can speculate on the future price of natural gas by purchasing a Henry Hub natural gas futures contract, which is traded on the Chicago Mercantile Exchange (CME). A contract is an agreement to buy or sell a specific quantity of a commodity at a specified date in the future for a fixed price. The prices of all futures contracts are based on the price at the Henry Hub, which is located in Louisiana, USA.
The CME trading hours for natural gas are 24 hours a day, Sunday through Friday. Traders can use their knowledge of the fundamental factors that drive the price of natural gas to develop a strategy that will maximize their chances of success.
Options are financial instruments that can be used to leverage positions on any asset. Traders can choose to purchase natural gas call options or put options, which give them the right, but not the obligation, to assume a position in the underlying futures contract. The premium payable for the option is typically lower than the margin requirement needed to open a position in the physical natural gas contract. Traders can also construct more complex options trading strategies known as spreads by simultaneously buying and selling natural gas call or put options.
A natural gas contract is worth 10,000 million British thermal units (mmBtu). Its price moves in increments of $0.001, or a tick. A tick is the minimum upward or downward movement a contract can make, and it determines your profit or loss for each trade. For example, if the price of natural gas moves by one tick and you have a position size of three contracts, your profit or loss is $50. For this reason, it is important to be aware of the tick value when trading.
Conclusion:
Natural gas futures prices are determined by a variety of factors, including supply and demand dynamics, weather patterns, geopolitical events, economic data, storage levels, and regulatory changes. Understanding how natural gas futures prices are priced is important for participants in the energy market who are looking to trade or invest in natural gas futures. By staying up-to-date on market trends and developments, participants can make informed decisions and improve their chances of success in natural gas futures trading.
FAQs:
- How are natural gas futures prices determined?
Natural gas futures prices are determined by the forces of supply and demand in the natural gas market. Factors that can affect natural gas futures prices include weather patterns, geopolitical events, economic data, storage levels, and regulatory changes. The futures price for natural gas reflects the market’s expectation of what the price of natural gas will be at a specific point in the future.
- Why is it important to understand how natural gas futures prices are priced?
Understanding how natural gas futures prices are priced is important for participants in the energy market who are looking to trade or invest in natural gas futures. By understanding the underlying factors that drive natural gas futures prices, participants can make informed decisions and improve their chances of success in natural gas futures trading.
- What are some factors that can affect natural gas futures prices?
Factors that can affect natural gas futures prices include weather patterns, geopolitical events, economic data, storage levels, and regulatory changes. For example, extreme weather conditions can increase natural gas demand for heating and cooling, while regulatory changes can affect the supply of natural gas.
- How can market trends and developments affect natural gas futures prices?
Market trends and developments can have a significant impact on natural gas futures prices. For example, increased production from shale gas formations in the United States has led to lower natural gas prices in recent years. Similarly, shifts in global demand for natural gas can affect natural gas futures prices.
- What are some strategies for trading natural gas futures based on price trends and developments?
Strategies for trading natural gas futures based on price trends and developments include using technical analysis to identify trends and patterns in natural gas futures prices, using fundamental analysis to analyze supply and demand dynamics, and monitoring industry news and events to stay up-to-date on market developments. It is also important to develop a solid trading plan and practice risk management strategies to protect against potential losses.
