So, you want to invest in natural gas? Well, you should know a few things or so about it before. So, let’s start.
Natural gas is a gas that is mostly made of methane and it is an important fuel source around the world. Natural gas is made naturally using two possible processes. It can be created either with a biogenic or thermogenic process. A biogenic process is created by methanogenic lifeforms that usually exists only in shallow waters or landfills. On the other hand, a thermogenic process is a natural gas that was created using organic materials that have been buried for a long amount of time.
So, as we all know, natural gas is a major source of power generation and it is used heavily in heating and cooling system in the U.S. Generally, we burn the natural gas and we are left with a product that can power gas turbines or steam turbines. Also, it should be noted that natural gas is much more preferred to coal or oil since it is far cleaner that those two options and it produce almost none greenhouse gasses.
Moreover, fuel has a very low density which makes it hard to transport using pipelines. Therefore, natural gas is usually localized business. On the other hand, natural gas has seen more than some improvement in transportation, mostly thanks to the technology called Compressed Natural Gas or CNG in short.
So, how to invest in natural gas?
If you are an investor and you are seeking to invest in natural gas, you should know that there are lots of options, from ETFs and ETNs to stocks! The marketplace is open for you demand. While physical exposure to natural gas is impossible, you can satisfy yourself with highly liquid natural gas futures contracts for the fuel. Lastly, don’t forget ETPs that invest in natural gas futures.
ETF natural gas
Eager to start? Great! If you are looking to gain exposure to natural gas (not physically of course) you can try exchange-traded products as there are more than several options available.
As some of you know, the most popular option is the UNG who has a net worth of $715 million, and most of it is natural gas futures. The second half of portfolio is mostly made of cash and treasuries. Furthermore, the ETF is tracking the price of 3-month natural gas futures.
On the other hand, we have UNL. It is a much smaller, with “only” $17 million in net worth compared to UNG. UNL tracks 12-month futures.
If you don’t like UNL or UNG, take a look at Teucrium Natural Gas Fund (NAGS). This ETF should suit you as it spreads risk by investing in multiple maturities and its main goal was to be a reflection of spot prices over a long period of time. If you are a long-term trader, NAGS is the perfect choice for you.
And, we have ETNs; the best choice would be iPath Natural Gas ETN (GAZ). GAZ is linked to an index that is mostly comprised of near month futures contracts. However, potential investors should be careful with this ETN as it has occasionally traded at a premium to its NAV because iPath has suspended creations.
If you are feeling bearish, there’s KOLD. It works the same as BOIL, but KOLF tracks the inverse of the natural gas index. Unfortunately, year-to-year returns have been very negative, up to -30%. Since the summer has started, KOLD recovered a bit, but it is known that natural gas fluctuates with the weather.
It is also worth taking a look into the First Trust ISE Revere Natural Gas ETF (FCG). FCG invests in stocks of companies that make revenue from the exploration and production of natural gas.
Investing in natural gas futures
If you are looking to invest in natural gas futures contracts, they are traded on the New York Mercantile Exchange under the symbol NG. Again, the market for NG is highly liquid and very active. Usually, the trading is the most frequent on Thursdays, that is when the Department of Energy releases its natural gas storage report. These storage reports are released weekly.
The price for natural gas futures contracts is heavily based on delivery at the Henry Hun in Lousiana. That is where 16 intrastate and interstate natural gas pipelines converge.
Fun fact: natural gas is the second-highest volume futures contracts in the world based on a physical commodity.
Natural gas stocks to consider
Looking to get indirect exposure by investing in companies that are engaged in exploration and production of natural gas? Great! There are lots of publicly-traded companies that are engaged in the production of different fuels, including natural gas and crude oil.
So, who are the largest producers when it comes to the production of natural gas?
- Southwestern Energy Co. (SWN) – one of the lower-cost dry natural gas producers in the U.S. In mid-June, the spot price for natural gas was $2.89 if we are to believe U.S. Energy Information Administration. The risk, of course, is whether the natural gas and crude oil will remain at these low prices.
- BHP Billiton (BHP) – it is important because it is the ninth largest producer of natural gas in the world. Don’t forget that is also one the biggest mining conglomerate in the world. Not only it supplies us with natural gas, but also with copper, iron one, oil, and coal.
If you want to trade in the natural gas commodity, there are lots of options for you; ranging from ETFs and ETNs to stocks. But, as with every commodity, be aware of seasonal volatility. You should always ask yourself first will natural gas be used currently or in the longer-term.
Moreover, investing in natural gas can be very tricky because every investor believes that you need to know how natural gas will do in future. The truth is rather simple, to avoid the speculation risk, you have to invest accordingly. At some point in the future, your portfolio will be thankful.