The natural gas futures market is well-established and allows traders to exploit unique opportunities in the supply and demand of natural gas. As a highly liquid market, natural gas futures provide an efficient trading alternative to energy stocks and ETFs for those looking to diversify their portfolio beyond the major market stock indexes.
The economic activity resulting from the global natural gas industry is a cornerstone of the global energy markets. Natural gas can profoundly influence the economic dynamics of almost every country in the world. More efficient gas extraction techniques and the ability to transport liquefied natural gas have allowed many more countries to utilize this beneficial natural resource and have established natural gas as a vital global trading market.
Why Trade Natural Gas Futures?
The natural gas futures (contract symbol = NG) market gives traders the opportunity to speculate on the price of natural gas. The global nature of the natural gas market offers a variety of trading benefits, including:
Direct exposure to speculate on price of natural gas movement
Increased flexibility versus trading natural gas stocks or ETFs
Virtually 24-hour access to highly liquid, cost-effective trading
Diversified trading uncorrelated to major market stock indexes
Trade Micro Natural Gas Futures to Reduce Costs
At 1/10th the size of the standard contract, Micro natural gas futures allow traders to access the energy futures marketplace with a reduced financial commitment. Other advantages of trading Micro natural gas futures include:
The ability to target opportunities in a popular energy market
Highly leveraged investment for more buying power
Reduced financial commitment vs. a larger natural gas contract
Increased flexibility for position management
Leverage also increases the risk associated with futures trading and only risk capital should be used for trading
Natural gas futures traders can be broken down into three main groups:
Commercial traders typically trade futures to hedge the price of natural gas for their business interests. For example, countries and large gas drilling companies with substantial gas reserves in the ground, like China, Russia, and the US will sell futures contracts to lock in prices when natural gas prices are elevated. Companies and countries that produce electricity will buy futures contracts to lock in prices when natural gas prices are lower than expected.
Large professional speculators are usually commodity pool operators, proprietary trading firms, institutional investors, large CTAs, and hedge funds. These traders are purely speculating on the price movement of natural gas and generally do not take physical delivery. Typically, commercial traders and large speculators make up 85% or more of the daily trading volume in natural gas futures.
Self-directed retail traders make up the remaining daily trading volume in natural gas, and like large speculators, rarely take actual delivery of natural gas. To prevent the possibility of physical delivery, they usually choose to close their future contracts prior to the first notice date.^
What Can Affect The Price Of Natural Gas Futures?
The price of natural gas is influenced by a variety of both short- and long-term economic and fundamental factors. Geopolitical events, alternative energy sources like renewables, environmental policy and regulations, and the growing worldwide energy infrastructure all play a part in the daily price of natural gas futures.
Global Economics
Global natural gas prices are often quoted and transacted in U.S. dollars (USD), and the strength or weakness of the USD can influence the price of natural gas. A stronger USD might make natural gas more expensive for foreign buyers, potentially reducing demand and prices. The health of the global economy can also influence the demand for natural gas. Economic downturns typically decrease energy consumption, leading to reduced demand for natural gas and potentially lower prices.
Production Levels
Advances in extraction technology, like hydraulic fracturing (fracking), have increased natural gas production in many places around the world. Higher production can also lead to oversupply, which can lower prices.
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Risks of Trading Natural Gas Futures and How to Manage Them
The primary risk of trading natural gas futures is that the price will go against the trader’s position. Having a risk management plan that includes stop losses or a trailing stop, along with appropriate trade sizing can help reduce your financial exposure.
In our global marketplace, it’s important to keep informed of economic activity and news that may affect and influence natural gas futures, including supply and demand data, USD index directional trend, and international and domestic energy reports.
Tips to keep in mind especially for newer futures traders include:
Practice in a futures trading simulator that reflects live market conditions until you prove to yourself that you’re comfortable with the market swings. When you start trading with real dollars, trade small to start, and work your way up.
Build a well-defined futures trading plan, including clear entry and exit criteria, analysis of market conditions, and a schedule for when you are and are not going to trade.
Henry Hub Natural Gas Futures Contract Specs: NG and Micro NG
Natural gas futures are standardized exchange-traded contracts that represent 10,000 MMBtu (million British thermal units) or 1,000 MMBtu of gold (Micro contract). 1 MMBtu is roughly 1,000 cubic feet of natural gas, so one contract is approximately 10 million cubic feet.
Retail traders typically buy and sell natural gas futures contracts to speculate whether the price will go up or down, and they typically do not take physical delivery.
Monthly contracts listed for the current year and the next 12 calendar years. Jan.(F), Feb.(G), Mar.(H), April(J), May(K), June(M), July(N), Aug.(Q), Sept(U), Oct.(V), Nov.(X), Dec(Z).
Monthly contracts listed for 24 consecutive months
Expiration style
Trading ceases on the third last business day of the month prior to the contract month.
Trading terminates on the 4th last business day of the month prior to the contract month.
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Natural gas is an abundant fossil fuel created by layers of buried plants and animals being exposed to intense heat and pressure over millions of years. It's primarily composed of methane but can also contain other hydrocarbons such as ethane, propane, butane, and pentane. Advancements in pipeline technology during the 20th century allowed for the mass transportation of natural gas, leading to its widespread adoption as the cost-efficient energy resource of choice.
The Henry Hub natural gas futures contract is one of the most actively traded natural gas futures contracts in the world. The Henry Hub is located in Erath, Louisiana, and is a nexus of several pipeline connections and related infrastructure to deliver and transport natural gas.
Natural gas is a cleaner burning fossil fuel, producing fewer emissions and pollutants than coal or crude oil. Due to its nature, it’s commonly used for heating, electricity generation, and cooking, as well as fuel for many private and public transportation vehicles. It's also a key ingredient in the manufacturing of many important products like plastics, chemicals, and fertilizers.
Natural gas futures trading is an agreement between a buyer and seller at a specified price in a contract that will expire on a specific date. Traders can enter and exit positions any time before one day prior to the expiration date in the physically delivered natural gas contract.
Natural gas futures contracts are tradable instruments for the purchase and delivery of 10,000 million BTUs of natural gas delivered at the Henry Hub natural gas distribution hub in Louisiana. Natural gas futures contracts, like all futures contracts, have a unique set of specifications that are set by the futures exchange.
Natural gas futures are traded on a well-regulated exchange where orders are matched and cleared on a fair and level playing field with full price and order transparency. Traders can place buy and sell orders through their broker to enter or exit a position virtually 24 hours a day in the natural gas futures market.
Yes, NinjaTrader is an industry-leading futures broker offering low commissions, low margin rates, and safety of your account funds. With NinjaTrader, you can trade dozens of the most actively traded futures markets in the world, including natural gas futures.
Economic activity from the global natural gas industry has a significant impact on almost every country in the world as it influences and supports countless essential activities and industries, including electricity generation, heating and cooking, and public transportation. The challenges and costs associated with natural gas exploration, fracking, and transportation make it a dynamic market to trade.
Natural gas futures offer traders direct market access to speculate on the price movement of natural gas. They provide good liquidity virtually 24 hours a day, lower trading capital requirements, and uncorrelated diversification. Natural gas futures can also offer traders more trading opportunities and flexibility over energy stocks and ETFs with their many limitations.
Like every futures contract, the primary risk here is that the price of the natural gas futures will go against the trader’s position. Energy sector news and government reports related to supply and demand, or storage and exploration, can all have a significant effect on the price of natural gas futures.
^In any futures market where there is physical delivery, in order to prevent the possibility of physical delivery, it is NinjaTrader’s policy to close all open futures positions one day prior to first notice date or one day prior to the last trading day, whichever is earlier.
