How to Invest in Natural Gas: Understanding a Volatile Market (2024)

From heating homes to powering industrial facilities, natural gas is a mainstay of the global energy mix. As the cleanest-burning fossil fuel, it’s a critical bridge fuel in the energy transition to lower-carbon alternatives. The International Energy Agency expects natural gas demand to rise by 31% by 2040, outperforming an expected 21% increase in oil demand.

However, like most commodities, natural gas is susceptible to geopolitical volatility. According to Bloomberg data, European gas prices are rising sharply, and have reached record levels this year as Russia has reduced its gas supply to Europe through the Nord Stream 1 pipeline. This shift, along with US outages and competition from Asia, has prompted increased demand in global LNG markets. And while natural gas is seen as the cleanest major source of energy, it is still part of the fossil fuel industry, which brings its own set of risks as climate change looms larger.

All these factors make natural gas an important market for investors, but the market is highly competitive and complex. So, how can retail investors gain exposure to this critical commodity?

Is natural gas a good investment?

Natural gas is an increasingly in-demand commodity, and plenty of potential trading opportunities might exist. Piero Cingari, Commodities Specialist at Capital.com, points out that renewables are not enough to fulfill the energy needs of today’s global economy, and that the world still heavily relies on fossil fuels like oil and gas.

“Among fossil fuels, natural gas is the cleanest and most environmentally friendly. The proven gas reserves have a life expectancy of more than 50 years, so it is still in abundance,” he says.

During natural gas transportation, the most important factor is safety. As a flammable substance, natural gas is transported safely and efficiently through a complex network of global pipelines. If transport by pipeline is not feasible—for example, in regions that are too far from extraction sites or connecting pipelines—then natural gas is transported in its liquefied state via tanker ships. “In its liquid form, storing and transporting natural gas over long distances is easy,” Cingari says.

What affects natural gas prices?

The price of natural gas is affected by macroeconomic factors, seasonality and industry supply and demand. “It’s important to understand the balance between supply and demand in both natural gas and oil markets,” Cingari explains. “Its cyclical nature also means that it is vital for investors to keep a close eye on any news that could impact the price of the commodity.”

Natural gas prices have soared in 2022, hitting their highest levels since 2008, and Cingari points to the ongoing conflict between Russia and Ukraine. “Since the start of the war in Ukraine at the end of February, the market has piqued investors’ interest because we have seen huge and extreme price volatility,” he says.

The US and Russia are by far the world’s largest producers of natural gas, accounting for around 40% of global supply in 2021, according to the Statistical Review of World Energy 2021. On the demand side, in 2021, global consumption grew by 5.3% and reached an all-time high; the US, Russia and China accounted for over 41% of consumption. Therefore, any changes to supply and demand in these countries can have an immediate effect.

Gas storage helps absorb supply shocks, especially as the Northern Hemisphere prepares for the winter increase in fuel consumption. The ongoing conflict in Ukraine has prompted EU nations to cut their reliance on Russian gas, and this has greatly contributed to the rising price of the commodity in recent months.

“Since the start of the war in Ukraine, European gas prices have increased by 300%, and about 600% from a year ago,” says Cingari. “This disruption happening in Europe has a similar effect on other gas markets around the world, like in the United States, as well as in Asia. Without Russian flows, the European Union had to buy more gas from abroad, but these suppliers were not ready to fulfill the large and unexpected demand coming from Europe.”

He believes that retail traders should educate themselves to understand the key drivers affecting global energy markets, financial instruments and the balance between supply and demand. “There are things that are out of the control of retail traders. Currently, the global energy market is literally seized by a small group of people; the decisions made by OPEC+ have a great influence on prices. Educating yourself on these key macroeconomic factors is critical,” he says.

Seasonality and consumption

While gas production is relatively stable, supply may experience unexpected disruptions due to pipeline maintenance, leaks or extreme weather. Gas producers, storage facilities and energy utilities manage their gas volumes according to seasonal demand, and adjust their operations to reduce financial risks. Having a general understanding of seasonality in natural gas markets is important to any investor planning a natural gas trading strategy, says Cingari.

Heating and cooling requirements drive demand in a cyclical pattern of consumption. Demand surges in winter in the Northern Hemisphere as residential and commercial locations increase their reliance on heating systems. Natural gas use is much lower in summer, but other factors may cause spikes in demand, such as climate change and the price of competing fuel sources such as oil. This cyclical pattern is reflected in the price of the commodity and is something to keep an eye on, adds Cingari.

Natural gas investment products

Natural gas stocks and ETFs are more suitable for longer-term investment, while futures contracts and contracts for difference (CFDs) are potentially more appropriate for those interested in trading the commodity over a shorter time.

Stocks allow investors to back publicly traded companies that operate in the natural gas sector. The performance of these companies influences the performance of stocks, which tend to increase in price when natural gas prices rise.

Many other factors can also affect a company’s share price, so it’s important to research shares thoroughly before investing in them. Natural gas ETFs are publicly listed funds that track the price of the commodity and pool investor capital to invest in natural gas-related assets.

Natural gas futures contracts allow for spot pricing—an agreement to exchange the commodity at a predetermined price on a specific date in the future. Futures can be bought and sold on futures exchanges and can be used to speculate on both rising and falling prices, or traded on margin, meaning that investors trading futures can access larger position sizes with a smaller upfront deposit; this can amplify both potential profits and losses.

While futures contracts have an expiration date—which means traders have a limit on how long they can hold a position open before having to exit or roll over the contract—CFDs do not. Trading natural gas CFDs allows traders to speculate on the price of the commodity by going either long or short.

“It’s a type of derivative by which retail traders can get exposure to a market without physically owning the underlying assets,” Cingari says. “With a small amount of capital, you can trade larger quantities that are otherwise unreachable by small retail traders. The advantage of trading CFDs on Capital.com is that you can also go short if you believe the price of a security is going to fall in the near term. The other side of the coin of using leverage is that it amplifies the volatility.”

CFD traders can hold their positions open as long as they have sufficient funds in their accounts. Traders need to be aware of the swap, which is an interest rate charged on CFD positions held overnight. Leverage magnifies both profits and losses.

How tech can help

Forecasting tools are a dime a dozen in the commodities market, but considering the number of moving parts that affect natural gas prices daily, these tools have severe limitations. Trading for success requires macroeconomic knowledge and, more crucially, education on how to trade effectively by challenging biases and addressing weaknesses in trading behavior.

Capital.com’s extensive repository of insights, education and trading tools helps new and experienced traders hone their understanding of markets—and technology makes that learning intuitive and seamless. More and more peopleare choosing to trade and invest for themselves and equally, they want tools and information that help them learn on the go and at their pace. Capital.com is built to support traders and help them invest in their abilities using a combination of cutting-edge technology and expert education tools.

Investing in natural gas may offer investors a potential hedge against inflation and a means of diversifying their portfolio. As with shares, commodity prices are volatile and should form part of a long-term investment strategy, depending on individual preference and appetite for risk.