Natural gas is playing a bigger role in the energy industry. Once viewed as a by-product of oil production, natural gas is now used in a variety of ways, from residential uses to industry to power generation. Natural gas cars are now a reality, with around 23 million natural gas vehicles around the world. It is the cleanest and most economical fossil fuel, contributing about 32% of US energy use in 2019, so it’s no wonder that it serves as an alternative to other fossil fuels. . With this in mind, investors should be armed with the information they need to make the appropriate investment decisions regarding natural gas investments. From who uses natural gas, how it is transported, its storage capacities, prices, trading methods, and spot and futures markets, investors will have the tools they need to better understand this commodity. clean combustion.
Nationally, the primary factor influencing demand for natural gas is temperature. In winter, natural gas is used for heating while in summer it is often used to power air conditioners. The demand and the price of natural gas therefore fluctuate whether it is summer or winter. During the winter, demand is at its peak and therefore prices adjust accordingly.
Natural gas users The three largest users of natural gas are industrial, domestic and electric production. Of the three, the use of natural gas for power generation has grown the fastest. By learning about who uses natural gas, investors can better assess the impact of demand on prices.
Industrial Industrial users often use natural gas as a source of heat. It ignites quickly and turning off a natural gas furnace wastes no fuel. Shutting off the fuel source can easily shut down a natural gas furnace. In comparison, a charcoal oven will continue to burn until the charcoal is depleted. This makes it much more expensive if the charcoal oven has to be started more than once.
National The largest residential use of natural gas is for home heating, especially in winter. About half of homes in North America use natural gas for heat. Other uses include boilers, ovens, water heaters, and outdoor barbecues. It can burn up to 2000 ° F (1093 ° C) from a simple stove top, making it a powerful home cooking fuel.
Energy production Power plants are the fastest growing users of natural gas, as natural gas-fired plants are more environmentally friendly than coal or oil-fired plants. Some natural gas plants operate year round, while others are more seasonal.
Transport Natural gas is most often transported by pipelines. This is mainly due to the fact that natural gas has a relatively low amount of energy per volume and the additional cost that containers would add. For comparison, a barrel of oil has the same energy content as about 6,000 cubic feet of natural gas or a 6: 1 ratio. One alternative is to liquefy natural gas to get more energy content by volume. However, it is not as cost effective as pipeline transportation, as it has to be cooled to -260 ° F (-162 ° C) to be liquefied. As a result, it is mainly used in this form for storage or for natural gas cars. To get an idea of how much energy even liquefied natural gas (LNG) contains compared to gasoline, LNG only holds about two-thirds of the energy for the same volume.
Depleted gas reserves Economically viable due to their ability to be reused, depleted gas reserves are the most common and cheapest form of underground storage. Typically, these storage facilities are operated on an annual cycle, withdrawn during the peak winter months, and injected with gas during the off-peak summer months. The proximity of the depleted gas reserve to the pipeline infrastructure and major gas markets also plays a role in the economic viability of the storage. To maintain the proper pressure in depleted reserves, approximately 50% of the natural gas must be retained as cushion gas.
Aquifers Subterranean permeable gas formations, aquifers naturally act as reservoirs of water. More expensive than depleted gas reserves, all infrastructure must be developed from scratch, from the installation of wells and pipelines. For this reason, storage in an aquifer requires more cushion of natural gas than a depleted gas reserve. About 50 to 80% of the total gas volume is cushion gas.
Salt caves Salt caves are well suited for storing natural gas. The walls are solid and the gas cannot leak. Cushion gas requirements are low, generally around 20 to 30% of the total gas capacity. However, salt caves are smaller than depleted gas reserves and even aquifer storage facilities, typically only containing about one-hundredth of the storage amount of a depleted gas supply. A key advantage, however, is the ability to store and dispose of natural gas quickly, resulting in more take-off and injection cycles per year, compared to the previous two methods.
Natural gas hub A hub is where two or more pipelines connect to each other. The most important hub for natural gas in North America is the Henry Hub, located along the US coast of the Gulf of Mexico. Here, the benchmark for natural gas prices is determined and traded for delivery on the NYMEX natural gas futures contract. This is the average price of natural gas negotiated at that location from 13 interconnected pipelines.
Pricing The terminology of the natural gas trade is different from that of other markets. When quoted by a merchant, the price is the difference between the Henry Hub price and the price for that location, called the base price. Base deviations can be caused by weather conditions, pipeline capacity, among other factors. However, if you ask a utility operator for the price, it is often the actual price of natural gas. Regardless of the price listed, the cost is the same to the consumer. Based on this terminology, a trader can create a base position by exposing himself to two different locations: the Henry Hub price and the price of that location. An actual position, also known as the low all-in price, the trader would be exposed to the price of gas in one place.
Trade There are several methods of trading natural gas. The easiest way is to take a directional position, taking advantage of the fact that the price increases or decreases depending on the position taken. However, as natural gas is cyclical, traders tend to speculate on the price by taking spread trades. Here are just a few:
Swing trades This is where an investor would buy natural gas for a low price and sell it for a high price. This is only possible if the trader can store natural gas for a defined period of time. Since even on a weekly basis, natural gas prices can be volatile, it is possible to buy during a period of low demand and sell when demand picks up, such as at the start of the week.
Location spreads It is betting on the price difference between two locations. As the price of natural gas can vary from place to place, there can sometimes be a substantial difference between the two locations. This is not helped by the fact that the transport of natural gas is not instantaneous and storage may be limited.
Heat rate These exchanges are based on the difference between the prices of natural gas and electricity. Usually the two trade together, but because they are determined using different mechanisms, sometimes prices can differ, with traders taking advantage of the volatility.
Time spreads Also called calendar spreads, these trades are where the trader bets, for example, that the summer will be hotter than usual, raising the prices of natural gas, thereby buying summer gas and selling winter gas. .
Exhibition opportunities While trading in natural gas futures may be an option, other alternatives include investing in fully integrated natural gas companies or gaining exposure through natural gas ETFs. It is up to the investor, his situation and his sophistication, to decide which method to use.
Inventories For natural gas trading, the U.S. Gas Inventory Report is often used to assess the current supply and demand for the previous week. This is published by the Energy Information Administration (EIA) every Thursday morning at 10:30 am.
Spot and forward prices Spot markets are prices for immediate delivery, while futures markets are for delivery for some time in the future. These are two very distinct markets that are fundamentally different in the natural gas market.
In the spot market, prices correspond to available supply and demand; when there is a shortage, prices can act erratically, as it is difficult to move the additional supply of storage in such a short time. In comparison, the futures market is less volatile, primarily determined by macroeconomic variables of seasonal supply and demand expectations.
Because of this essential difference between the futures and spot markets, pricing closer to delivery becomes less certain. Indeed, any delivery complication can have a negative effect on natural gas prices. However, this volatility in the spot market does not generally affect futures prices. Futures prices tend to follow a regular pattern: high prices in winter and lower in summer.
The bottom line Investing in commodities like natural gas can be complicated and difficult to understand. The use of natural gas is growing in popularity and knowing the fundamentals of natural gas can help investors make better decisions about when to buy or sell.