Selling (Going Short) Natural Gas Futures to Profit from a Fall in Natural Gas Prices

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How to Start Day Trading Natural Gas

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The price of natural gas fluctuates from moment to moment, as it is publicly traded on an exchange. The price of natural gas is determined by global supply and demand for the physical commodity, as well as the expectations and supply and demand from traders. Day traders don’t assess the “real” value of natural gas. Instead, day traders profit from daily price fluctuations in the commodity, attempting to make money whether it rises, falls or its value stays nearly the same.

Futures Markets

Day trading natural gas is speculating on its short-term price movements. Physical natural gas isn’t handled or taken possession of, rather all the trading transactions take place electronically and only profits or losses are reflected in the trading account.

There are a number of ways to day trade natural gas. One way is through a futures contract. A futures contract is an agreement to buy or sell something–like natural gas, gold, or wheat–at a future date. Day traders close out all contracts (trades) each day and make a profit or loss on each trade based on the difference between the price they bought the contract and the price they sold it.

Natural gas futures trade through the Chicago Mercantile Exchange (CME Group). There are several types of natural gas, and contracts, which can be traded. The most heavily traded contract, preferred by day traders, is the Henry Hub Natural Gas Futures (NG). Each contract represents 10,000 million British thermal units (mmBtu).

On the futures exchange, the price of natural gas (NG) fluctuates in $0.001 increments. This increment is called a “tick”–it’s the smallest movement a futures contract can make. If you buy or sell a futures contract, how many ticks the price moves away from your entry price determines your profit or loss. To calculate your profit or loss (your trading platform shows you, but it’s good to understand how it works) you’ll first need to know the tick value of the contract you’re trading.

For a Natural Gas contract (NG) the tick value is $10. This is because the contract represents 10,000 mmBtu, and 10,000 mmBtu multiplied by the $0.001 tick size results in $10. That means for each contract, a one tick movement will result in a profit or loss of $10. If it moves 5 ticks, you win or lose $50. If it moves 5 ticks and you’re holding 3 contracts, your profit or loss is $150.

Trading Accounts and Margin

The amount you need in your account to day trade a natural gas (NG) futures contract depends on your futures broker. NinjaTrader for example, requires you have $1000 in your account to open a day trading position for one natural gas (NG) contract. You also need enough in the account to accommodate for potential losses (need much more than $1000).

These figures assume you’re day trading and closing out positions before the market closes each day. If you hold positions overnight, you are subject to Initial Margin and Maintenance Margin requirements, which will require you have more money in your account.

ETFs and Stock Market NG Plays

Another way to day trade natural gas is through a fund which trades on a stock exchange, like the United States Natural Gas Fund (UNG). Or, if seeking a more volatile option (moves three times as much each day), the 3X Long Natural Gas ETN. If you have a stock trading account you can trade the price movements in natural gas.

The 3X Inverse Natual Gas ETN (DGAZ) is another popular natural gas ETF. Since it is an inverse fund, it moves in the opposite direction of the natural gas price, on a daily basis.

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The intraday price movements of these products are reflective of daily (not long-term) percentage price changes in natural gas.

The products trade like stocks. The minimum price movement is $0.01, therefore you make or lose $0.01 for each share you own each time the price changes by a penny. Stocks and ETFs are typically traded in 100 share blocks (called lots) so if the price moves a penny and you’re holding 100 shares, you make or lose $1. If the price moves $1, from $5 to $6, you make or lose $100 on your 100 share position. If you are holding 500 shares, you make or lose $500 on that same price move.

The amount you need in your account to day trade a natural gas ETF depends on the price of the ETF, your leverage, and position size.

To become a day trader of stocks or ETFs in the U.S., you need to have a $25,000 minimum trading account balance. Depending on how much income you want to generate and your leverage, you may wish to have more than $25,000 available to you.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Natural Gas Boom Fizzles as a U.S. Glut Sinks Profits

Chevron’s multibillion-dollar write-down of gas assets is the most recent sign that the gas supply has far outstripped demand.

HOUSTON — A decade ago, natural gas was heralded as the fuel of the future. In shale fields across the country, hydraulic fracturing uncorked a lucrative new source of supply. Energy giants like Exxon Mobil and Chevron snapped up smaller companies to get in on the action, and investors poured billions of dollars into export terminals to ship gas to China and Europe.

The boom has given way to a bust. A glut of cheap natural gas is wreaking havoc on the energy industry, and companies are shutting down drilling rigs, filing for bankruptcy protection and slashing the value of shale fields they had acquired in recent years.

Chevron, the country’s second-largest oil and gas giant after Exxon, said on Tuesday that it would write down $10 billion to $11 billion in assets, mostly shale gas holdings in Appalachia and a planned liquefied natural gas export facility in Canada. The move was an energy company’s clearest acknowledgment yet that the industry has been far too optimistic about the prospects for natural gas.

While cheap natural gas continues to take market share from coal in the electricity sector, supply of the fuel has far outstripped demand. As a result, once-booming gas fields in Arkansas, Louisiana and Texas have become quiet backwaters. The number of gas rigs deployed nationwide has dropped to 132, from 184 last year.

“In the short term the gas market is oversupplied and is likely to remain so for the next few years,” said Andy Brogan, oil and gas global sector leader at EY, the firm formerly known as Ernst & Young. “It’s a cyclical business, and we’re at the bottom of the cycle.”

Some analysts said the gas slump could persist for some time because the cost of wind and solar energy has tumbled in recent years, making those renewable sources of energy more attractive to power producers. And while gas exports are climbing, growing production of the fuel in Qatar, Russia and Australia threatens to drive down international prices over the next few years.

Nowhere are the declining fortunes of natural gas more in evidence than in Appalachia, where the Marcellus field centered in central and western Pennsylvania was once viewed as the most promising in North America. With gas prices slashed nearly in half from a year ago, the number of drilling rigs operating in Pennsylvania has dropped to 24, from 47, over the last 12 months. EQT, one of the premier producers in the Marcellus, recently cut nearly a quarter of its work force, eliminating 196 positions.

That is a far cry from the picture Chevron painted when it acquired Atlas Energy almost exactly 10 years ago for $3.2 billion, while assuming $1.1 billion in debt, cementing its foothold in southwestern Pennsylvania. At the time, George L. Kirkland, then Chevron’s vice chairman, predicted that the “strong growth potential of the asset base and its proximity to premier natural gas markets make this targeted acquisition a compelling investment.”

Other energy companies have also acknowledged losses, though not to the same extent. Exxon Mobil wrote down the value of its American natural gas assets by $2.5 billion in recent years after buying the natural gas producer XTO Energy for more than $30 billion in 2020.

Gas producers have struggled in part because New York and other Northeastern states have made it harder to build pipelines to transport the fuel. But analysts point to a far bigger problem: The industry is just producing too much gas. In some oil fields where gas bubbles to the surface with crude, it has become cheaper for producers to burn the gas than gather it and send it to market.

“Natural gas is in the tank,” said Patrick Montalban, president of Montalban Oil & Gas Operations. “We’re looking at a project right now of over 200 wells in Montana that are for sale, but they are uneconomic. Not only are the wells uneconomic, the gathering of the gas is uneconomic.”

American natural gas inventories are about 19 percent higher than a year ago, according to the Energy Department. The government estimates that the average spot price for natural gas will be $2.45 per million British thermal units in 2020, about 14 cents below this year’s average. At its peak in 2008, the benchmark price topped $10 per million British thermal units.

Exports of liquefied natural gas are rising sharply, but future profits may be meager. S&P Global Platts warned this week that European gas prices could slide next year, reducing how much money United States exporters can earn.

Moody’s Investor Service predicted that several gas exploration and production companies active in the Marcellus will face heightened financial risks over the next three years because of the debt they have accumulated. Between 2021 and 2023, companies such as Antero Resources, CNX Resources, EQT and Gulfport Energy will need to refinance between $3.5 billion and $4 billion in debt. All told, the producers have to repay lenders more than $12 billion during that period.

“If low natural gas prices persist beyond 2020,” the Moody’s report said, “companies may need to reduce debt to maintain compliance with financial covenants or amend covenant levels.”

Many smaller companies have sought bankruptcy protection or indicated that they could go out of business. Shares of Chesapeake Energy, the Oklahoma-based champion of shale gas drilling, traded at more than $60 in 2008. Now they sell for less than a dollar. Chesapeake warned in a recent securities filing that if prices remained low and it was unable to comply with the conditions of its debt, “there is substantial doubt about our ability to continue as a going concern.”

Such pessimism is widespread.

“We expect the trend of write-downs to continue as price outlooks are adjusted down,” said Tom Ellacott, senior vice president at Wood Mackenzie, a research firm.

Of course, low natural gas prices have been a boon to users of the fuel, especially electricity utilities, which are increasingly replacing coal-fired plants with ones that use gas. Gas is expected to have provided about 37 percent of electricity produced in the United States this year, up from 34 percent in 2020, according to the Energy Department. But renewables are climbing even faster.

In a recent report, Morgan Stanley estimated that demand for natural gas would grow for a few years but fall 13 percent between 2020 and 2030 as utilities increasingly switch to wind and solar power. Future regulations or a carbon tax put in place by lawmakers worried about climate change could accelerate the transition to renewables.

Exports offer perhaps the greatest growth potential for American natural gas. But even as companies build more liquefied natural gas export terminals across the Gulf Coast, competition from Russia and Qatar is intensifying and analysts fear there could soon be a global glut of gas.

Natural gas price forecast: what to expect from the global gas market

Winter is coming, driving the demand for natural gas higher. Cold weather conditions resulted in a new gas consumption record in the US with a +10 per cent increase as of November 20, 2020. According to the latest EIA short-term energy outlook, natural gas storage injections in 2020 outpaced the previous five-year average, as a result of increased natural gas production.

Natural gas market outlook

Analysing natural gas in 2020, Fatih Birol, executive director of EIA, mentions, “Natural gas helped to reduce air pollution and limit the rise in energy-related CO2 emissions by displacing coal and oil in power generation, heating and industrial uses. Natural gas can contribute to a cleaner global energy system. But it faces its own challenges, including remaining price competitive in emerging markets and reducing methane emissions along the natural gas supply chain.”

Driven by China’s battle against air pollution, 2020 was considered a golden year for natural gas. Moving forward, global demand for natural gas is predicted to grow over the next five years due to strong consumption in rapidly growing Asian countries and further development of the international gas trade.

Trade US Natural Gas Spot CFD

Surge in demand for global gas and natural gas liquids (NGL)

According to EIA’s Gas 2020 report, demand for natural gas is expected to grow by more than 10 per cent over the next five years, reaching 4.3 trillion cubic metres by 2024.

China is taking the lead, accounting for more than 40 per cent of growth in international natural gas demand, as the Chinese government is aiming to improve air quality by turning away from coal. In 2020, the consumption of Natural gas in China grew 18 per cent, but this pace is expected to decrease up to 8 per cent in five years.

Experts predict a strong growth in consumption from other Asian countries. including India, Pakistan and Bangladesh, where industrial sector serves as the main growth driver.

The use of natural gas as a feedstock and fuel will expand at an annual rate of 3 per cent, accounting for half of global consumption. Power generation remains the major source of natural gas consumption, in spite of competition from coal and renewables.

The Natural Gas Liquids (LNG) market in particular will undergo significant changes. Today, India and China are major LNG importers along with a growing demand from Europe. From the supply perspective, the three major LNG exporters are the United States, Australia and Qatar.

The US and China lead production growth

The United States and China are the main contributors to natural gas supply, together accounting for more than 50 per cent of overall production growth. A global supply increase can affect the natural gas price forecast for several years ahead.

According to the EIA’s natural gas price analysis, The United States increases its average total supply of natural gas and imports more natural gas from Canada.

The World’s second largest economy is also increasing its natural gas supplies. China’s National Petroleum Corporation (CNPC) has started building one of the largest underground centres for natural gas storage in Panjin city, China. The facility will manage to store 11.5 billion cubic meters of natural gas. The construction will cost 60bn yuan ($8.5bn, £6.58bn). In general, the CNPC shared plans to build 22 more gas storage facilities by 2030.

Natural gas price prediction in winter: will natural gas prices go up?

Traders are used to thinking that cold weather is the exact time when natural gas prices go up. However, is it always true?

According to US natural gas forecast for winter 2020 by the Natural Gas Supply Association, the supply and demand for natural gas during the cold season is expected to grow year-on-year. Cold winter weather plays a crucial role in commercial and residential gas demand. At the same time, production growth is expected to respond quickly to the increase in demand.

Historic oil price drop
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A cold winter scenario can maintain natural gas price momentum. However, if we analyse several winter seasons in a row, we will notice that natural gas not always experienced a price surge. The natural gas market can be volatile and the price can fluctuate greatly depending on milder weather conditions and geopolitical factors.

Watch a short video by chief market strategist David Jones, making a detailed natural gas market analyses for winter 2020.

Natural gas price forecast 2020

Natural gas and LNG expansion continues. According to future natural gas prices predictions by McKinsey & Company, the demand for LNG is expected to grow 3.6 per cent per year to 2035 driving the prices up.

  • Gas is expected to be the fastest-growing fossil fuel, increasing 0.9 per cent per year
  • Over the past 12 months, the natural gas market expanded by 5.3 per cent and the LNG segment grew at 8.6 per cent
  • 35 per cent of new LNG supply capacity under construction can contribute to bullish natural gas price trend until 2025

According to the latest EIA’s natural gas price projections, Henry Hub prices are expected to average at $2.73/MMBtu for the final month of 2020. Giving its prediction for natural gas prices in 2020, EIA forecasts natural gas prices to average $2.48/MMBtu, which is 13 cents lower than the 2020 average price.

A lower natural gas price forecast reflects a slowing of US natural gas export growth and decline in natural gas demand, which keeps inventories bigger than average, even regarding slower natural gas production.

Since the beginning of 2020, the natural gas price decreased $0.37/MMBtu of 12.38 per cent. Providing a long-term natural gas prediction, Walletinvestor expects natural gas prices to be down to $2.503 in a 12-month period.

Globalisation of the natural gas trade

Recently, we have seen a convergence in natural gas prices in major regions. The difference in regional prices, especially between Asia and Europe, have significantly decreased. This can be considered as an important step towards globalisation of the natural gas trade.

Although implementing market-driven pricing mechanisms in the emerging economies is still a challenging endeavour, the expansion of LNG trade is considered a positive sign for further development of sustainable trade environment and greater price convergence.

The globalisation of the natural gas trade, largely shaped by geopolitical events, will ensure that in case of a supply disruption in one country, other nations can fill the gap.

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