Natural Gas is one of the most important sources of fossil fuel for energy generation around the world.
In my previous article, I discussed the basics of natural gas and why a trader should consider trading the Henry Hub Natural Gas futures (NG).
In this post, I'd like to go in-depth on 3 key tips to become a better Natural Gas (NG) trader!
#1 Understand the factors that impact natural gas price
Natural gas is an important energy source that is impacted by supply and demand. Hence, it is crucial to understand the fundamentals that could impact the price of natural gas.
There are 2 key components that impact the price of natural gas, namely: Supply side and Demand side factors:
(i) Supply Side - Production:
A continuous production of natural gas is crucial to ensure that the supply of natural gas is able to keep up with the demand.
As an example, should a colder-than-usual winter strike cause the freezing of natural gas production plants' facilities, it'll impact the overall supplies of natural gas.
According to the data from the US Energy Information Administration (EIA), US Natural Gas production has been on a rising trend over the past decade, indicating a rising demand for natural gas as a whole:
(ii) Supply Side - Inventory:
Natural gas inventory is also an important piece of information while trading the NG futures.
A lack of inventory relative to the actual demand will cause the price of natural gas to go up.
Let's check out the historical inventory data for US' natural gas for the past decade:
From this, it is clear that the inventory for natural gas sticks to a relatively fixed sideway pattern, where it will reach its peak and bottom in certain months. This clear seasonality of natural gas inventory will be discussed in the next section.
(iii) Supply Side - Import & Export:
As a natural gas-producing country, the US is a net exporter of natural gas. However, US will also import some natural gas to cater to the demand during the winter season.
Meanwhile, the US' export of natural gas has been in an increasing trend for the past decade, supplying natural gas to other parts of the world:
(iv) Demand side - Weather
It is also equally important to understand the factors that will impact the demand for natural gas.
One such factor is the weather. Since natural gas is used extensively for electricity and heat generation, the demand for natural gas tends to be higher in the summer (cooling) and winter seasons (heating).
#2 Understand NG's seasonality
From the previous section, it is not hard to notice that most fundamentals of natural gas have very clear seasonality.
As such, having a solid understanding of natural gas' seasonalities is a must in order to become a good NG trader.
Let's explore a few examples:
(i) Natural Gas consumption tends to peak in winter
One important use of natural gas is heating. In the US, winter months (Dec - Feb) tend to be the time of the year when natural gas is consumed the most.
(ii) Natural Gas inventory tends to peak PRIOR to the winter
Another interesting insight we can see from the data is that inventory of natural gas tends to rise every month, and peaks prior to winter. Once winter hits, the inventory will be used to cater to the winter demand.
In other words, inventory tends to lead consumption data in the case of natural gas.
#3 Be mindful of the fundamental risks of NG
Being an important source of energy generation, there are many factors that can cause the increase and decrease in the demand (and supply) of natural gas.
Let's explore a few of the factors:
(i) Colder than usual winter
Colder than usual winter means more heating, which will lead to an increase in demand for natural gas.
Should the inventory for natural gas is not able to cater to the unexpected rise in demand, then it will likely cause an increase in natural gas price.
(ii) Warmer than usual winter
Likewise, a warmer-than-usual winter means less heating demand, which will lead to a drop in natural gas consumption.
As a result, more natural gas inventory being stored is not used, resulting in a supply that is larger than the actual demand, which could potentially lead to a drop in natural gas price.
(iii) Rise of renewable energy sources
The rise of renewable energy sources, such as solar and wind could also impact natural gas as an energy source.
Should renewable energy become cheaper and more readily available, it could cause natural gas demand to fall.
This is not as obvious in the US (yet):
However, some countries in Europe (eg. Luxembourg and Denmark) are already producing most of their energy from renewable sources:
Verdict: Trade NG smarter by knowing its seasonalities and risks!
Trading is not easy but knowing crucial insights like seasonalities and potential risk for the instrument you are trading can be massively helpful in making better trading decision.
Are you going to give natural gas trading a try? Let me know in the comment section below!
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Disclaimers
Any of the information above is produced with my own best effort and research.
This post is produced purely for sharing purposes and should not be taken as a buy/sell recommendation. Past return is not indicative of future performance. Please seek advice from a licensed financial planner before making any financial decisions.
Leverage is a financial tool that comes with its advantages and risks. Please learn and understand both the upsides and downsides of leverage before using it for trading.
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