What Is Natural Gas

Date Modified: 09/01/2024

Natural gas is one of the world’s most valuable energy commodities that is used in various industries and is one of the most traded and used energy commodities in the world. It can be used to generate heat and electricity and to fuel vehicles.

Being this crucial, many may want to understand what it is precisely, what moves its prices, and how and when to trade it. This article delves into the ins and outs of natural gas trading.

An illustration of natural gas commodity trading

What Is Natural Gas?

Natural gas is considered a fossil fuel. Fossil fuels refer to energy sources extracted from the Earth’s crust. In other words, natural gas is essentially the product of the remnants of animals, plants, and microorganisms that lived millions of years ago. Natural gas is also a hard energy commodity that is mined or extracted from the earth similar to gold, copper, crude oil, and gasoline.

Furthermore, it would be worth noting that there are different types of natural gas that are extracted in different ways. This is mainly because the extraction of natural gas is not always straightforward and easy. Accordingly, the natural gas that is easy to extract is called “conventional gas,” whereas natural gas that is not as easily extracted is called “unconventional”.

How to Trade Natural Gas

Trading natural gas is the act of speculating on its price movements, i.e. whether it would go up or down, and acting accordingly. This can be done in multiple ways and some of the most popular ones are natural gas Futures.

What Are Natural Gas Futures?

To understand how natural Futures work, it is important to first comprehend how Futures contracts function, in general.

Futures are derivative contracts between a buyer and a seller obligating them to transact the underlying asset at a predetermined price and date in the future. To learn more about how Futures contracts work, you can read our article- “What Are Futures Contracts and How Do You Trade Them?”

The same process applies to natural gas Futures whereby the two parties involved in the contract are obligated to purchase natural gas at the preset price and time in the future.

In addition, it would be helpful to know the specifications of natural gas Futures contracts which are as such:

  • Ticker Symbol: depending on the Futures exchange, natural gas contracts can either be NG or ENG.
  • Contract Months: all months of the year.
  • Unit of measurement: it is usually measured in thermal units of about 10,000 million BTUs.
  • Prices: Natural gas Futures are priced in cents per million BTUs.

To find out more about the specifications of a Futures contract, read our article on “Terminology and Symbols in Futures Trading.”

What Unit Is Natural Gas Traded In?

Natural gas along with other energy sources tend to be measured in British Thermal Units (BTUs), which are essentially the amount of heat natural gas contains and is needed to raise one pound of water by 1 degree Fahrenheit.

What Are Natural Gas Trading Hours?

Trading Hours: natural gas is usually traded from 23:00 Sunday to Friday 22:00 time with a trading break between 22:00 to 23:00 GMT.

What Drives Natural Gas Prices?

Like many commodities, natural gas prices can be quite volatile and can be affected by a plethora of factors some of which are the following:

  • Supply and demand: perhaps one of the most basic laws in finance, supply, and demand posit that natural gas prices can depreciate if the supply exceeds the demand and can appreciate if the demand surpasses the supply.
  • Weather conditions: weather conditions can affect gas prices. Accordingly, natural gas prices tend to hike during summer time when, naturally, the demand for heating is lower and tend to hike in winter time due to heightened demand for heating.
  • Economic and geopolitical conditions: economic conditions such as changes in currency rates or economic decline can affect natural gas prices. In addition, geopolitical tensions and turbulence in natural gas-producing countries can lead to volatility in the commodity’s prices.
  • Storage costs: the cost of storing natural gas and transporting it can also affect its prices. If, for example, there’s not enough storage space, it is likely to result in higher shipping costs.

Nonetheless, despite the aforementioned factors, it is important to note that past price patterns do not necessarily affect future prices and that the market can be volatile and unpredictable.

For traders interested in trading natural gas Futures, Plus500’s Futures platform offers Futures contracts on commodities, indices, forex, and cryptocurrency with low and attractive day margins and no trading fees. Traders may also want to experiment with Plus500 free and unlimited demo trading account which allows them to trade Futures contracts in real-market conditions without having to commit their real money.