Natural gas futures allow investors the opportunity to trade in one of the hottest, most in-demand energy commodities in the global economy today – a commodity that is likely to continue to increase in value as the years go by.
Natural gas has quickly emerged as a leading source of energy in the world. In 2010, the United States used 683 trillion cubic meters of natural gas in anything from creating electricity to powering stoves, water heaters, and even vehicles. As the price of oil rises and supplies of petroleum become constricted, the popularity of – and demand for – natural gas will more than likely rise as well. As a result, traders closely watch natural gas and are very active in natural gas futures.
Here, I’ll give you an overview of natural gas futures, including contract specifications, natural gas futures prices, and factors impacting the value of this commodity.
Details of Contracts
Natural gas futures are sold on several exchanges and in several forms. One of the most popular natural gas future contract forms is the Henry Hub futures contract, traded on NYMEX. The natural gas futures symbol for this particular contract is NG.
You can also find two additional forms on the IntercontinentalExchange (ICE): UK Natural Gas Contracts and Title Transfer Facility (TTF) Futures, which come from the Netherlands. Since Henry Hub futures are the most popular, we’ll focus on those.
The trading hours for this particular contract run Sunday through Friday, from 6:00pm to 5:15pm the next day. With the exception of a 45-minute break, trading is electronically conducted day and night.
All contracts are quoted in U.S. currency per MMBtu (one million British thermal units) and are sold for 12 consecutive months. Minimum price fluctuation is $0.0001 per MMBtu. One contract represents 10,000 MMBtu; 1,000 Btus equal one cubic foot, so this contract size equals 10 cubic feet.
Mini Contracts: NYMEX does offer e-mini natural gas futures contracts that enable you to trade smaller amounts of natural gas with lower margin requirements. The symbol for these e-mini Henry Hub futures is QG. The size of the contract is 2,500 MMBtu.
Trading futures requires you to have a certain amount of funds or capital available in your account when you trade. This is called margin and is what allows you to leverage your capital and control larger amounts of the commodity you’re trading.
Margin requirements vary by delivery date. Beginning in October, 2012 and ending in March, 2013, initial margin requirements are $2,970. Maintenance requirements are $2,200.
Futures Price, Factors, and Trading Tips
Natural gas is a very valuable commodity – as well as a very volatile one. Factors impacting natural gas value include seasonal variations (since natural gas is used to generate electricity and heat/cool homes), severe weather disruptions (such as hurricanes in the Gulf of Mexico, a key natural gas-producing region in the world), and alternative energy developments.
First, we’ll look at seasonal variations. Natural gas futures prices tend to rise leading into the winter in the Northern Hemisphere, mainly because natural gas needs to be used most heavily in the winter. Prices tend to fall in the summer, although extremely hot summers can boost demand because of increased air conditioning.
Weather disruptions – such as hurricanes in the Gulf – can cause natural gas spikes. This was the case in 2005 when Hurricane Katrina not only wreaked havoc on land, but also severely disrupted oil and natural gas production.
Supply is also limited by physical facilities and structures, such as pipeline capacity. One contributing factor to price spikes is increased demand being stifled by physical limitations. Natural gas producers are always working to extend their distribution capacity, but in peak times supply facilities can’t keep up with demand.
Historically, the price of natural gas has spiked tremendously at times, but in absolute terms, the price is barely above its 1990 level, as shown in the natural gas price chart below:
It is thought that the long-term price stability (ignoring severe price spikes) is due to limitations on development, discovery, and scarcity. With that being said, scarcity has largely evaporated thanks to the advent of chemical fracking in oil production which has dramatically increased the amount of recoverable natural gas reserves in the United States. This is one of the main factors why the price of natural gas has fallen and remained relatively low.
It pays to pay attention to the weather when trading natural gas futures. Temperature fluctuations happen constantly and almost always move the day-to-day price of natural gas. If you expect a heat wave – or a cold snap – you can anticipate some movement in the price of natural gas in the short-term.
For longer-term trading, technological developments in the alternative-fuel industry (using natural gas as a transportation fuel source) and in the petroleum industry (development advances in drilling oil that make natural gas more readily available) can increase demand or increase supply permanently.