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Natural gas - Trading with commodities

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Often forgotten, however, is the possibility of trading in natural gas. Quite wrongly, because natural gas is probably the fossil fuel with the greatest future potential. In the following article we would like to explain to you why this is so and what other areas of application natural gas has. We will also explain how you can best trade natural gas. We will describe all relevant factors influencing the price of natural gas and explain how you can participate in the price development with natural gas CFDs.

What are the uses for natural gas?

Bridge technology for renewable energies

The problem with solar and wind energy is that they are very volatile, as they only actually generate electricity when weather conditions are optimal. Therefore, bridging technologies are needed to ensure a constant power supply even when the weather is unfavorable. This is where natural gas comes in. It can mitigate the volatility of renewables in three ways.

For one thing, natural gas can pick up slack in renewable energy by being used directly to generate electricity. This method produces far fewer CO2 emissions than burning coal and oil, offers strong performance, and provides immediately available energy thanks to natural gas's so-called quick-start capability.

Natural gas can also act as a storage medium for excess renewable energy that cannot be fed into the power grid immediately. The so-called power-to-gas process ensures that hydrogen is generated by electrolysis, which is then transferred to the natural gas grid or converted into synthetic natural gas via methanation. Conventional and synthetic natural gas or hydrogen are thus mixed.

Third, natural gas is an excellent transport medium for green hydrogen. H2 is seen as the energy storage medium of the future, but it evaporates quickly and is generally difficult to transport. By mixing hydrogen with natural gas, the transport problem is eliminated. In addition, the existing gas pipeline infrastructure can be used. The addition of hydrogen is possible up to a proportion of about 20 percent.

Generation of heat for heating

Today, the most widespread application of natural gas is certainly still the generation of heat for heating. Advantages: Natural gas does not have to be stored in a cumbersome way like oil, it is much cheaper and available almost everywhere as soon as an appropriate connection has been made. In principle, heating works in such a way that natural gas is burned and the resulting heat energy is then transferred to the heating water. This water is then piped to the radiators.

Use as fuel for cars

As CNG (compressed natural gas), natural gas can also be used as an alternative fuel. Almost all vehicles with gasoline engines can be converted to run on natural gas. To do this, the vehicles are fitted with an appropriate compressed air tank in the trunk, which is filled with the highly compressed natural gas. In addition, a minor modification of the engine is necessary. The natural gas can be refueled at special filling stations.

How big are the deposits of natural gas and where are they located?

The world's natural gas reserves can be divided into two categories: reserves and resources. Reserves are natural gas that has already been explored and whose extraction is economically feasible according to the current state of the art. Resources, on the other hand, are those natural gas deposits that have been explored but whose extraction is not currently viable from a technical or economic point of view.

According to current knowledge, natural gas reserves will last for about 60 years, assuming consumption levels remain constant. With the currently known resources, it would be possible to cover current consumption for just under 150 years. Both values are significantly higher than the corresponding estimates for crude oil.

Natural gas is present around the globe in many different countries and on all continents. In terms of reserves, the five largest deposits are located in the following countries (sorted in descending order):

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What factors influence the price of natural gas?

Climate and weather extremes

The colder the winter gets globally, the more heating energy is consumed and the more natural gas is needed. More severe winters therefore cause the price of natural gas to rise. In the winter of 2020 / 2021, the cold season in the USA started exceptionally early. Accordingly, people heated earlier and more than usual, which depleted inventories accordingly. In between, weather conditions were so adverse that production even had to be suspended in some cases. Both of these factors drove up prices.

Natural gas inventories

The U.S. Energy Administration issues public water level reports on the current natural gas inventories in the United States at any given time. These are regularly replenished at the end of the winter. The lower the inventories, the more positive the effect on the price of natural gas, and vice versa. The level of inventories in turn depends on consumption in the winter months as described above.

Oil price

Even though the oil price link for natural gas may no longer appear in contracts with private consumers, the prices of the two fossil energy sources still move very similarly to each other on the world markets. Low oil prices entail equally low natural gas prices.

Economic situation

When industrial production is running at full speed worldwide, large quantities of crude oil and natural gas are needed, which has a correspondingly price-driving effect. Conversely, a recession leads to deep cuts in world market prices. Cold or hot conflicts fought on a geopolitical terrain also dampen the economic situation and have a corresponding effect on the price of natural gas.

Does seasonality have an impact on natural gas?

If you trade commodities, you should in any case know their seasonality (if any). Seasonality is the recurring occurrence of certain price developments in a defined period of a year. In the case of natural gas, such a cyclical behavior can be observed. As described in the previous section, U.S. natural gas inventories are replenished at the end of the cold season. Specifically, the U.S. usually begins this process in late February or early March. Thus, natural gas demand regularly increases during this period. Accordingly, natural gas prices also tend to rise from March onwards. You should definitely keep this in mind when trading natural gas.

Natural gas price forecast: How will the natural gas price develop until 2025?

However, trading natural gas is dangerous when the global economy is in recession. This is because energy-intensive industrial companies in particular are major consumers of natural gas. The Corona crisis provided impressive proof of this in 2020. Natural gas therefore behaves similarly to Oil and is dependent on the global economy and geopolitical factors.

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Risk note Plus500: 79% of CFD retail investor accounts lose money.

How to trade natural gas?

Natural gas is a commodity which, in contrast to precious metals, cannot easily be acquired physically on the spot market. Those who want to trade natural gas must therefore resort to indirect investments. In addition to ETPs (Exchange Traded Products), trading with CFDs is also a possibility.

An ETP is nothing more than an exchange-traded financial instrument that tracks a specific index or underlying. With such an index certificate, you can therefore participate in the price development of natural gas in the long term.

To trade natural gas in the short term, however, a CFD is more suitable. The term CFD (contract for difference) is used to describe derivative financial products in which you enter into a contract with your broker on a specific underlying asset (here: the price of natural gas). With a CFD, you can speculate on both rising and falling prices. 

The highest possible leverage for CFDs on commodities is 1:20. Please note that this increases the risk of loss by the same factor. To avoid additional fees, CFD trading should be completed within one business day. CFD trading is possible within the usual exchange hours. The close of trading is usually at 22:00 UTC+2.

What are the most exciting natural gas stocks?

Gazprom

Gazprom is certainly one of the first stocks that people associate with natural gas. No wonder, after all, the company, more than 50 % of which is state-owned, is the world's largest natural gas producer. In addition, the Group also generates revenues from crude oil and the operation of the entire Russian gas pipeline network. This year, spurred on by the completion of Nord Stream 2, among other things, the Group was able to shine with a strong share price performance above 60 %.

Gazprom is also known for its exceptionally high dividends. Gazprom's management has announced that it will distribute a large portion of its cash flow in dividends. Important to note: In addition to political risks, the weak ruble is also a threat. Since Gazprom accounts for all sales and profits in rubles, they are worth less in this country if the ruble depreciates against the euro.

Equinor

Another industry heavyweight is Equinor from Norway. The Scandinavians are Europe's second-largest gas supplier. Like Gazprom, Equinor is not a pure natural gas company, but also generates revenue from oil and wind farms. Equinor pays its shareholders a decent dividend. Shares in the Norwegian company can also be an interesting hedge against currency risks of the euro, as the share certificates are listed in Norwegian kroner.

Advantages of trading with natural gas CFDs

If you want to trade commodities, i.e. exploit short-term price fluctuations on a daily basis, a CFD is the first choice. In contrast to precious metals, it is not possible to physically trade natural gas. Index certificates are rather intended for long-term investment.

With CFDs, you are not dependent on rising prices, as you can make profits even if prices fall, provided you have previously speculated on this scenario. If you trade commodities using a leveraged CFD, you can increase your chances of winning (accepting a higher risk).

Risk note Plus500: 79% of CFD retail investor accounts lose money.

Plus500 risk note: CFD are complex instruments and come with the high risk of losing money quickly because of the leverage effect. 79% of retail investor accounts lose money trading CFDs with this provider. You should consider whether you understand how CFD work and whether you can afford to take the high risk of losing your money.