There is no doubt that global boundaries disappeared with the Internet. Especially in global trade, the removal of borders via the internet has enabled people from all over the world to trade or invest easily. While Foreign Exchange markets are the preferred investment option for savers with the various opportunities they offer, the increasing volume of trading led to an increase in the variety of financial products.
The lack of physical delivery, which is one of the most important advantages of Forex, led savers to invest in a variety of commodities other than currency pairs. While this feature of Forex markets gave its investors the advantage of investing for many years in the energy group, especially in crude oil, NatGas has recently become a popular investment instrument with the expansion of the Forex product range. However, savers need to know about NatGas, its price, the developments that affect its price and most importantly, the elements that should be considered when investing, in order to make the right decision while investing in the forex markets.
What is NatGas?
Natural gas is a kind of fossil fuel that has emerged in the lower layers of the Earth through natural transformations such as high pressure and temperature for millions of years. It is the subject of trading in futures or spot market via futures contracts.
Although natural gas, which has similar flammable properties to oil, is only available in limited quantities on all continents except Antarctica. Its largest producers are the United States, Russia, Iran, the United Kingdom, the Netherlands, and Canada. Natural gas has 95 percent methane in its composition and does not have properties such as smell and color. It is also an important energy source in agriculture and industrial manufacturing as well as for individual consumption.
Although the physical trade of natural gas is carried out by international agreements, usually via a pipeline between countries, it has become an important trading instrument with the development of money and capital markets in recent years.
Natural Gas is traded with contract code such as ‘NatGas’ or ‘NG’ in the world’s largest futures and options exchanges, especially in NYMEX. However; since international investors have several difficulties to trade on this stock market, it has become more attractive for investors to buy and sell futures contracts in the forex markets.
Both the futures and spot prices of NatGas are formed as a result of the meeting of the buyer and seller in the market, in other words, at the point where the quantity offered and the quantity demanded are in equilibrium. However, there are various factors that also affect the supply and demand equilibrium.
Factors Determining NatGas Prices
The price is determined by the weight of supply and demand equilibrium. When it is accepted that there are natural reserves in almost every continent of the world, the most important factor affecting the price of the market, in other words, the natural gas supply is the production. There are two factors. The first is the amount of production and the second is the stock status.
The largest producer of natural gas, with total proven reserves of 196.9 trillion cubic feet on earth, is the United States, with 831.8 billion cubic feet, in 2019. The United States, which accounts for 20 percent of the natural gas in the market, was followed by Russia with 669.5 billion cubic meters and Iran with 239.5 billion cubic meters. In addition, the country with the largest proven natural gas reserves is Russia with 38.9 trillion cubic meters. Iran, 31.9 trillion cubic meters, and Qatar, with 24.7 trillion cubic meters, hold the second and third place in terms of reserves.
The amount of supply and stock status of natural gas is highly important for an investor, who is/wants to be involved in the spot or futures market. The increase in quantity supplied in the market or the amount of natural gas stockpiled may be the determining factor in a decline in prices because of an expectation that it will lead to a surplus in supply. On the other side, a decline in quantity supplied in the market or the amount of natural gas stockpiled may shape investors’ expectations for the future that there may be a surplus in demand and thus, a rise in prices.
Global developments may also affect NatGas prices. The demand for natural gas can also decrease in extraordinary situations, such as the global economic crisis or pandemic, due to a significant weakening of the amount of energy demanded by both individual and industrial consumers around the world. Thus, while investors’ future expectations are reflected in futures contracts in a downward direction, the spot market also gets its share.
Developments in countries producing natural gas or holding reserves have a high degree of importance. Economic problems, terrorist activities, extraordinary weather conditions in the United States, which is the highest natural gas producer, or in Russia, which has the largest natural gas reserves, may affect the amount of supply, which may directly affect the prices.
On the other hand, as a generally accepted substitute, the change in the coal industry could also lead to a reaction in natural gas prices. A significant rise in coal prices, combined with variables such as development in the coal industry and an increase in demand, could make natural gas more attractive to the consumer, considering the new prices in NatGas. In this case, natural gas prices, which could shift energy demand, may also rise.
Points to Consider in Trading
- Economic, political and geopolitical developments in major natural gas producing countries should be closely followed. How the market will react to the amount of change in supply should be estimated.
- Data that will provide important clues to supply and demand equilibrium in the market should be examined regularly. As a preliminary indicator, the weekly natural gas report published by the EIA (U.S. Energy Information Administration) should be followed. But kindly note the volatility that can be experienced as a result of the data.
- Global news that could affect the energy market should be followed momentarily. Instant news can change the direction of the price, as well as create an imbalance in buyers and sellers, leading to an increase in spreads.
- The oil and coal industry must be followed. The development of the coal industry, in particular, can be followed by using both technical analysis and basic analyses.
- Market participants’ views might be forecasted by examining monthly future prices of NatGas contracts traded on futures and options exchanges.
- Short, medium and long term investment strategies should be determined by synthesizing the preliminary opinions of the experts with the help of basic and technical analyses.