As an important fuel source in the world, Natural Gas is a gas that consists mainly of methane and is created using biogenic or thermogenic mechanisms. First, biogenic is created through methanogenic life forms which exist in shallow water or landfills. Second, thermogenic gas is created from organic material which has been buried for a distinct amount of time.
In the United States alone, natural gas is a major source of power for their heating and cooling systems. Generally speaking, natural gas is used to A) power gas turbines or B) burned to produce steam and power steam turbines. With that in mind, the fuel is preferred to coal or oil as it is much cleaner and creates fewer greenhouse gases.
The demand for gas is quite localized as the fuel has a low density and sending the fuel across oceans or in cargo ships is unrealistic. That said, in the last few years, thanks to the onset of Compressed Natural Gas, this fuel has seen considerable developments in this respect. Considered to be ‘greener’ than gasoline, natural gas has become very popular in key gasoline consuming markets. As a result, some have petitioned for more reliance on the fuel for transportation.
For those interested in energy investing or investing in natural gas directly, you have options. Even though there is no physical exposure, investors do have the opportunity to purchase liquid futures contracts for the fuel. Furthermore, purchasing stocks or an ETF will allow an investor to buy companies who are engaged in the output of natural gas. Last but not least, investors are able to purchase ETPs which invest in natural gas futures, either in a broad energy basket or exclusively.
Investing in Natural Gas
Currently, there are three ways to invest in Natural Gas: Exchange-Traded Funds, Futures, and Stocks.
Natural Gas ETFs: What Are They?
There are numerous options available for those looking to gain exposure to natural gas through ETFs.
As it invests in front month futures contracts, the United States Natural Gas Fund (NYSEARCA:$UNG) is the most popular option for investors. By investing in front month futures contracts, the UNG will display a high correlation to spot prices over a short term. However, these prices might be affected by the impacts of contango in the long run.
Teucrium Natural Gas Fund ($NAGS) is another option for investors hoping to gain exposure to natural gas. This ETF was designed to reflect spot prices over the long term while spreading exposure across multiple dimensions. For short-term traders, the United States Natural Gas Fund might be more attractive. However, for those looking for long-term exposure, it is recommended that you invest in the Teucrium Natural Gas Fund.
Another option is the United States 12 Month Natural Gas Fund. This fund spreads exposure to futures contracts across 12 separate months. By doing so, the potential for an unfavorable roll yield is minimized. However, this might abate correlation to spot natural gas prices.
Last but not least, there is a natural gas ETN, known as the iPath Natural Gas ETN (NYSEARCA:$GAZ). This ETN is connected to an index which consists of near month futures contracts. Keep an eye on this product, however, as it is sometimes traded at a premium to its NAV since iPath has halted creations.
If utilizing futures contracts to gain exposure to natural gas is something that you value, it is recommended that you invest in any of the ETPS mentioned above. If, however, you are looking for an ETF that offers exposure through equities, check out the First Trust ISE-Revere Natural Gas ETF. This ETF will invest in the stocks of companies which take revenue from the exploration and production of natural gas.
Natural Gas Futures: What Are They?
Traded on the New York Mercantile Exchange under the NG symbol, the market for natural gas futures contracts are extremely liquid and active throughout the week. Generally speaking, Thursday is the heaviest day of trading in natural gas futures. This is because Thursday’s are when the Department of Energy releases its weekly natural gas storage report.
It is worthwhile noting that the NYMEX natural gas futures represent 10,000 million British thermal units and these futures are priced in dollars and cents per mmBtu. In terms of listing, contracts are listed for the current year and the next 12 years. Once one calendar year ends, the next calendar year is added. For the CME Globex, contracts are listed for the current year plus the next eight years.
Natural gas futures contracts prices are based on the delivery at the Henry Hub in Louisiana. This is where 16 intrastate and interstate natural gas pipelines meet, and these pipelines supply markets throughout the United States.
Based on a physical commodity, natural gas is the second-highest volume futures contract in the world.
Natural Gas Stocks: How You Can Buy Them
Some wish to avoid exposure to futures contracts, therefore, these investors will gain indirect exposure to the fuel by investing in companies who are actively engaged in the exploration and production of natural gas.
Additionally, there are numerous publicly-traded energy companies who engage in both natural gas and crude oil output. This, however, might cause natural gas prices to fall. That said, there are a few companies whose operations focus solely on natural gas. These companies are as followed:
– PetroHawk Energy Corporation
– Stone Energy Corporation
– SandRidge Energy (OTCMKTS:$SDOCQ)
– McMoran Exploration Co
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