Why Natural Gas Commodities are in the spotlight
Natural gas trading is quite underrated. As concerns over supply of the more ‘normalized’ fossil fuels continue to ramp up, exploration of the semi-sustainable natural gas front is a priority focus for many countries – with a concomitant market movement to match.
When it comes to commodities, gold and oil are the most popular. However, in trading it pays to have a diversified portfolio. One area that has been rapidly growing in the energy sector is natural gas. It represents an opportunity to tap into a growing market free from the political risks posed on the oil.
Natural gas has become the second most-traded energy commodity in the world.
Natural gas is often mistaken as a by-product of crude oil together with gasoline and heating/cooking oil, but it is much more complex. Natural gas often exists alongside oil reserves, but it is not processed from crude oil such as petrol, diesel or heating oil.
With the push towards cleaner energy, natural gas has been thrust into the spotlight as it’s one of the cleanest energy supplies; it emits low carbon dioxide emissions, especially when compared to oil, when burnt. The drilling technology used extracting and the production of natural gas has advanced tremendously in recent years. It’s much more cost effective and could potentially cover energy needs in the future. These two factors are the primary reasons it has become the No.2 tradable commodity in the energy sector.
EXTRACTING GAS FROM THE GROUND
Since natural gas is usually found near oil reserves, it needs to be extracted from the ground. Once extracted it is processed into gas and liquid forms. This makes its more suitable for transport across countries via trucks, trains or pipelines. To ensure that the extracted material meets the quality standards, it is transported to specialist factories and/or facilities to be examined, treated and stabilized. Once it receives regulator’s stamp of approval, processing can begin.
Natural gas is used in many ways by various consumers; it can be used for heating, electricity generation and for cooking via gas stoves. Though the energy sector is the primary consumer of gas, the biggest applications are household and private-related.
Natural gas is currently the second most used form of energy-generating power; as of 2022 it represents 22% of globally generated power. The popularity of natural gas has been maintained by its increased use in developing countries throughout China, Indonesia and Africa.
Natural gas can be used to heat buildings, fuel vehicles and power industrial furnaces. Household appliances such as stoves or radiators use natural gas.
Henry Hub Natural Gas (NG) futures are currently the industry benchmark and they are traded through the Chicago Mercantile Exchange Group (CME Group). The name is derived from the Henry Hub, a natural gas pipeline in Louisiana which serves as the official delivery location for futures contracts. By volume, natural gas futures are the third largest physical commodity futures contract in the world.
Unlike oil, which can be found in vast reservoirs below the earth’s surface, natural gas is often trapped within rocks and sediment. To extract it, companies will usually use a process known as hydraulic fracturing, or fracking. Companies force water, chemicals and sand deep into the earth to flush out natural gas pockets.
SOME INTERESTING FACTS ABOUT THE NATURAL GAS TRADING MARKET
Clean and efficient natural gas can be supplied from within the US, although 84% of the world’s natural gas reserves are held by 15 countries, most of which are in the Middle East. Modern technology advancements have also boosted yields significantly, although natural gas still lags a little behind traditional fossil fuels. It can be exported in liquefied form (LPG), but is tricky to store, meaning demand is almost always high. Pipelines cannot be run (easily) across oceans, so the LPG technology that is enabling export opens up an interesting market move. This can have various repercussions on the market and cause great volatility. It has moved from the fossil fuel market throw-away by-product to a critical component of its own.
WHY SHOULD YOU CHOOSE NATURAL GAS COMMODITIES?
In short, its low priced, has a favorable environment, great economic position and is in rising demand. Natural gas commodities are becoming exceedingly popular on the market, and natural gas trading could well yield spectacular profits for traders regardless of the trading strategy they choose to adopt.
Of course, as with all commodities there are no guaranteed returns, but natural gas is a market that has the ‘green’ economy watching with interest. It also produces interesting by-products due to the need for refinement and removal of chemical compounds. These products themselves, like ethanol, can also be sold on to refiners who have other uses for them, and contribute to the economy in turn.
WHAT INFLUENCES THE PRICE OF NATURAL GAS?
Previously, natural gas has been difficult to export as pipes cannot be run to the destination. However, the cost of converting to liquid natural gas has dropped considerably of late, and is beginning to open up the possibility of a lucrative export market.
Qatar is currently the world’s home base for natural gas fields, with potential for 1180 trillion cubic feet of gas – about 20% of the world’s supply. However, strained US and Middle East relations do little to foster an environment for safe exports. Over 85% of natural gas is spread between only 15 countries, and the US doesn’t dominate the international arena despite the potential for local domestic consumption.
All of these factors will have a daily impact on the natural gas price movement, as they influence the economy of manufacturing countries.
On the other hand, improving technology makes gas extractions easier, which will increase demand over time. Likewise, you will have issues of domestic vs. international production to balance within the market demands.
Is natural gas trading and the natural gas commodity market right for you? CMTrading firmly believes that this commodity market offers a lot of potential.