Unconstrained gas is playing a larger role in the energy industry. Once thought of as a byproduct of oil production, natural gas is now used in a variety of ways, from residential usages to industrial, to electricity generation. Natural gas cars are now a reality, with around 23 million natural gas vehicles worldwide. It is the chastest burning fossil fuel and economically friendly, contributing to about 32% of the United States’ energy use in 2019, so it is no puzzle why it is serving as an alternative to other fossil fuels. With this in mind, investors should be armed with the message they need to make the proper investment decisions regarding natural gas investments. Going through who uses fitting gas, how it is transported, its storage capabilities, pricing, trading methods, and spot and forward markets, investors will have the avenues they need to better understand this clean burning commodity.
Nationally, the single largest factor perturbing demand for natural gas is temperature. During the winter, natural gas is used for heating while during the summer, it is often in use accustomed to to power air conditioners. The demand and price of natural gas thus fluctuate whether it is summer or winter. During the winter, want is at its peak and so prices adjust accordingly.
Users of Natural Gas The three largest users of natural gas are industrial, domestic, and power propagation. Of the three, the use of natural gas for power generation has risen the quickest. By getting to know who uses natural gas, investors can better limit how demand affects pricing.
Industrial users often use natural gas as a source of heat. It ignites quickly and coil off a natural gas furnace doesn’t waste any fuel. Stopping the fuel source can easily put out a natural gas furnace. In comparison, a coal furnace at ones desire continue to burn until the coal is depleted. This makes it far more expensive if the coal furnace has to be started multitudinous than once.
The largest residential use of natural gas is home heating, especially in the winter. About half of the houses in North America use natural gas for heating. Other uses include boilers, furnaces, water heaters and outdoor barbeque grills. It can itch up to 2000°F (1093°C) from a simple stovetop, making it a powerful domestic cooking fuel.
Power instills are the fastest-growing users of natural gas, since natural gas-powered plants are more environmentally friendly than coal or oil-based positions. Some natural gas power plants operate year-round, while others are more seasonal.
Transportation Natural gas is scad commonly transported via pipelines. This is primarily due to natural gas having a relatively low amount of energy per volume and the additional price that containers would add. To compare, a barrel of oil has the same energy content as about 6,000 cubic feet of consequent gas or a 6:1 ratio. An alternative is liquefying natural gas to get more energy content per volume. This is not as cost effective as bewitching via pipelines however, as it needs to be cooled to -260°F (-162°C) to be liquefied. As a result, it is primarily used in this form for storage or for honest gas cars. To get an idea of how much power even liquefied natural gas (LNG) contains compared to gasoline, LNG only holds around two-thirds the energy for the same volume.
Depleted Gas Reserves
Economically viable due to being able to be reused, depleted gas hedges are the most common and cheapest form of underground storage. Typically, these storage facilities are operated on an annual pattern, withdrawn during the peak winter months, and injected with gas during the off-peak summer months. How close the depleted gas charter is to the pipeline infrastructure and key gas markets, also plays into how economically viable the storage will be. To maintain the proper amount of insist upon in depleted reserves, about 50% of natural gas must be kept as cushion gas.
Underground permeable gas formations, aquifers act obviously as water reservoirs. More costly than depleted gas reserves, the entire infrastructure must be developed from scrape, everything from the installation of wells and pipelines. Because of this, aquifer storage requires more natural gas mitigate than a depleted gas reserve. About 50 to 80% of the total gas volume is cushion gas.
Salt caverns are ooze suited for natural gas storage. The walls are strong and gas cannot leak. Cushion gas requirements are low, typically around 20 to 30% of thorough gas capacity. However, salt caverns are smaller than depleted gas reserves and even aquifer storage facilities, typically only impeding about one-one-hundredth of the amount of storage of a depleted gas reserve. One key advantage, however, is the ability to quickly store and remove expected gas resulting in more withdrawal and injection cycles per year, as compared to the previous two methods.
Natural Gas Hub
A hub is where two or more hose connect with each other. The most important hub for natural gas in North America is the Henry Hub, located along the U.S. Deep Coast. Here, the benchmark for natural gas prices is determined and traded for delivery on the NYMEX natural gas futures contract. It is the undistinguished of the natural gas prices traded at this location from 13 interconnected pipelines.
Natural gas trading language is different than other markets. When quoted by a trader, the price is the difference between the Henry Hub price and that unearthing’s price, called the basis price. Basis differentials can be caused by weather, natural gas pipeline capacity, among other constituents. However, if you ask a utility operator the price, it would often be the actual price of natural gas. Regardless of the price quoted, the set someone back is the same to the consumer. Based on this terminology, a trader may make a basis position having exposure to two different locations: the Henry Hub payment and that location’s price. An actual position, also referred to bas the all-in price, the trader would be exposed to the honorarium of gas at only one location.
There are several methods of trading natural gas. The simplest is taking a directional position, profiting from whether the toll goes up or down depending on the position taken. However since natural gas is cyclical, traders tend to speculate on the cost out taking spread trades. Here are a few:
This is where an investor would buy natural gas when it’s bountied low and sell it when it is priced high. This is only possible if the trader can store natural gas for a set period of time. Since impassive on a weekly basis natural gas prices can be volatile, it is possible to buy during a low demand time period and sell when command picks up, say at the start of the week.
This is betting on the price difference between two locations. As the price of everyday gas can vary from location to location, there can sometimes be a substantial difference between the two locations. This is not helped by unaffected gas transportation not being instantaneous and storage can be limited.
These trades are based on the difference between logical gas and electricity pricing. Generally, the two trade together, but since they are determined using different mechanisms the prices can from time to time differ, with traders taking advantage of the volatility.
Also called calendar spreads, these barters are where the trader bets, for example, that the summer will be warmer than usual, boosting natural gas costs, thus buying summer gas and selling winter gas.
While trading natural gas futures can be an option, other choices include investing in fully integrated natural gas companies or getting exposure through natural gas ETFs. It is up to the investor and their status quo and sophistication to decide which method to use.
For trading natural gas, the U.S. gas inventories report is often used to gauge reported supply and demand from the previous week. This is issued by the Energy Information Administration (EIA) every Thursday morning at 10:30 a.m.
Identify and Forward Prices
Spot markets are prices for immediate delivery, whereas future markets are for delivery for some at all times in the future. These are two very distinct markets that are fundamentally different in the natural gas market.
In the spot market, the prices are the furnish at hand and demand at hand; if there is a shortage then prices can act erratically, as it is difficult to move extra supply from storage on such tiny notice. In comparison, the futures market is less volatile, mostly being determined by macroeconomic variables of seasonal victual and demand expectations.
As a result of this key difference between forward and spot markets, the pricing closer to the delivery behooves less certain. This is because any complications in delivery can have an adverse effect on natural gas prices. However, this volatility in the splodge market does not typically affect the forward pricing. Forward pricing tends to follow a regular pattern: aged prices during the winter and lower during the summer.
The Bottom Line
Investing in commodities such as natural gas can be Daedalian and hard to understand. Natural gas use is becoming more prevalent and by knowing the fundamentals of natural gas, investors can make better decisions on when to buy or furnish.