Natural gas is one of the most important natural resources available on Earth, and natural gas trading is one of the most popular ways for people to invest in this commodity. With demand rising, and fracking promising to meet the demand, many investors believe it’s a “sure thing.” However, if you plan on investing in this sector, be prepared for the risks you face, the tax implications, and the expenses you can incur.
Supply and Demand Mismatch
Natural gas is unique among commodities because the supply often doesn’t meet the demand at the same time. This is called “seasonal mismatch.” Demand is highest in the winter in areas where it is used as a heating source. It typically exceeds supply during heating months, so it needs to be stored. This is especially true in colder climates.
In summer months, demand is lower than the available supply. However, the price of natural gas remains relatively stable throughout the year. As an investor, it’s important to understand this so that you do not mistakenly buy into investments expecting to see a great return on your investment in the winter.
The market prices seasonal mismatch into the cost of natural gas through various storage mechanisms, which are usually holding tanks. The tanks store up the gas, which is then depleted during high-use months.
Distribution Of Natural Gas
When investing in natural gas, drilling and prospecting are just one consideration. Even when proveable reserves are discovered, the country needs to have an infrastructure to support transport of the gas.
Pipes are the usual way that gas is transported because it’s cheap, reliable, and gas companies can control the rate or flow of gas. However, building, and maintaining, an underground pipeline is expensive.
As a customer, part of the cost of natural gas is wrapped up in transportation costs. As an investor, you benefit from this.
One contradictory factor in seasonal mismatch is unexpected weather. Normally, the price of natural gas remains constant, or at least relatively stable, throughout the year on the production and supply side.
However, when an unexpected cold snap hits the UK, parts of Russia, or the U.S., it can cause the price of natural gas to skyrocket. This type of price fluctuation benefits both investors and speculators, though speculators tend to benefit slightly more, since they attempt to cash out before the price settles after the cold snap ends.
This is where natural gas futures trading can be beneficial. If you can correctly predict possible future demand for natural gas, or you have an intricate understanding of weather patterns, you may be able to profit from natural gas futures trading.
Speculators attempt to manipulate the price of natural gas through natural gas trading, including futures trading. What a trader hopes for it to either bid up the price through rapid buying of small gas-producing companies or junior mining companies, or bid down the price by short-selling shares of gas-producing companies.
Natural gas futures trading tries to take advantage of future natural gas prices.
“Going long” refers to investing in a company for a long period of time, with the expectation that your investment will pay off after many years of holding the investment. It can also refer to buying the investment with the expectation that it will simply increase in price, whether that’s 2 months or 2 years.
“Shorting” an investment refers to betting against it. In other words, some investors will borrow shares of a natural gas stock and sell them, hoping that this helps depress the price of the stock. If you’re “going long,” these investors are betting against you.
Both traditional natural gas trading and natural gas futures trading are subject to tax on profits. Natural gas is taxed based on how you hold the investment. In countries with a capital gains tax, you will pay capital gains tax rates on any stocks, mutual funds or futures contracts you sell when you want to cash out of your investment.