Trading Natural Gas, Key Energy Commodity Of The Future

With growing focus on the dynamics of global energy security, trading natural gas offers an opportunity to profit from exposure to this key hydrocarbon commodity.

As concerns grow over the depletion of petroleum reserves, the overall balance of the world energy sources will begin to change.

Natural gas currently makes up about 22% of the world energy mix, and demand is set to expand as its contribution to electricity generation in OECD countries increases.

The ICE Futures Europe route gives you the opportunity to trading natural gas as a physical contract for UK markets.

Meanwhile, NYMEX natural gas futures as an alternative is a means of exposure to the profit potential of trading the US market, where the price action is based on delivery to the Henry Hub in Louisiana.

As an alternative to trading futures it is possible to gain exposure to this energy sub-sector using an exchange traded fund or energy ETF which covers all the energy components or just focuses on natural gas, such as UNG.

Traders and investors can get a good indication of the importance of this resource by looking at the various commodity indexes which weight the various commodities according to different criteria.

In the USA the gas market from well-head to end user is far more transparent in the past and the market has now been deregulated.

The price of natural gas for physical delivery in different states is driven by the balance between supply and demand at one of the major pipeline hubs within a given region.

What are the dynamics of world natural gas markets?

As with crude oil, there is a concern over natural gas reserves and how long can these last given current or even increased levels of consumption.

According to the BP Statistical Review of World Energy 2008, at the end of 2007 the world had proven natural gas reserves of 177.36 trillion cubic metres.

And to put this into proper perspective, this review looks at these proved reserves (which can be recovered in future assuming existing operating conditions) and sees how long they may last on the basis of current production levels.

This is called the R/P ratio (reserves to production) and the latest estimates suggest global reserves will last just over 60 years.

It is worthwhile noting too that proven reserves have increased by 66% in the twenty years to 2007, but the question remains whether that rate of new field discoveries will continue or are we approaching “Peak Gas”.

Supply of Natural Gas

Worldwide natural gas production has risen 31% from 2,236 billion cubic metres (bcm) in 1997 to 2,940 bcm in 2007. The main global producers are the Russian Federation (20.6% of total) and the USA (18.8%).

But a closer analysis of the figures shows wide variation between a massive doubling of production by Middle East producers and a mere 5% increase over the decade for North America.

If the USA cannot bring on stream more of its potential but unproven reserves then it will most likely have to significantly increase its current levels of imported liquefied natural gas (LNG).

Demand for Natural Gas

With growing awareness of the climate changing impact of burning hydrocarbons, the switch to natural gas is favoured because of its smaller carbon footprint compared to coal and petroleum.

This form of energy is easier to use and there are energy efficiency gains to be made, so all round a shift towards this cleaner fuel can improve the quality of life of people around the world.

Over the ten years to 2007 world natural gas demand has increased by 30% from 2,245 bcm to 2,922 bcm. The largest consumer is the USA with 653 bcm (22.6%) followed by the Russian Federation consuming 439 bcm (15%).

All these factors can be positive for trading natural gas going forward.

Among the factors driving demand are the weather, leading to increased heating needs in winter and cooling requirements in hot summers.

Also playing a growing role with a very different cycle is the increasing use of natural gas in electricity generation, as this takes an increasing share of the gas market.

Future Prospects

The consumption of natural gas is projected to increase going forward as it substitutes for the more carbon intense hydrocarbons as well as being in greater demand with the increase in infrastructure and urbanisation in developing countries.

Trading natural gas is likely to present significant opportunities for the commodity trader going forward, as well as for those preferring to take a more passive, less leveraged position, such as tracking the various commodity indexes which reflect the prices of energy related futures contracts.







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