Trading Natural Gas Futures

There’s something about trading natural gas futures that conjures up memories of Enron’s glory days (before they decided to screw everyone out of their money). Natural gas is one of those types of commodities that’s not considered to be “sexy” or “popular”, but it is just as much a vital part of the Energies complex as crude oil. As a matter of fact, natural gas has recently been coming to the forefront as an extremely viable source of energy, and the U.S. has become quite the exporter of natural gas in recent years. We would actually do good to take our own advice, basically, and start using clean natural gas as one of our main sources of energy instead of old dirty, slimy crude oil. As far as the contract specifications for natural gas go, one futures contract of natural gas represents 10,000 million British Thermal Units (mmBTU’s) of natural gas. What this means as far as point value goes is that if natural gas goes from 4.631 to 4.632, that’s a 0.001 move up in price, which equals to a $10.00 gain (if you bought a contract). Natural gas trades on the CME Group Exchange (formerly and more famously known as “The Merc”, for Chicago Mercantile Exchange), and it trades in all months (January through December), unlike most other commodities that only have certain specific contract months in which they trade. Again, it has been considered to be the “ugly step-sister” of crude oil, with crude having the spotlight the majority of the time, but trust me, fortunes have been made (and unfortunately lost) in trading natural gas futures as well, however “un-sexy” it may be.

One thing to keep in mind about natural gas futures—and really any energy commodity for that matter—is that prices will rise and fall based on weather conditions a lot of times. If you think about it, it just makes natural sense…if we have an extremely harsh winter, people will be using more natural gas and heating oil to heat their homes, thus driving the demand for the commodities up, thus making the prices rise as well. It’s really a very common sense thing. Another thing to consider is if there’s any type of weather threat to the Gulf of Mexico area, such as during hurricane season. Since many large natural gas production facilities reside along the GulfCoast, any weather threat to the physical stability of their production facilities can cause natural gas prices to spike. In general natural gas is well-known to be a very volatile market, and it is not for the weak of stomach. Even the option premiums on natural gas futures reflect this volatility, as they are known to be more expensive overall as a way to compensate for the heavy implied volatility of the natural gas market. As far as the heavyweight producers of natural gas goes, Russia and the U.S. currently hold the top two spots (respectively) for natural gas production, and their combined output is roughly 42% of the world’s natural gas. Pretty cool. But as far as trading natural gas futures goes, I would recommend (although I am far from a professional broker) that you trade “Nat Gas” conservatively with stop-loss points in mind BEFORE you enter the trade, and that you actually trade with stops once you’re in the market. It would not be a bad idea, either, if you had an option opposite your position for protection. For instance, if you were long one natural gas futures contract, you might want to buy a put option close to your entry point to protect against downward price moves. If you were short one natural gas futures contract, you might want to buy a call option close to your entry point. This is a prudent way for a beginner to go about trading natural gas futures, as you don’t want your trading career to be cut off early due to a lack of proper position management. Always remember—if you manage the downside, the upside will take care of itself.