Understanding the Basics of Natural Gas

Natural gas is a vital energy source used for heating, cooling, and electricity generation. It also provides energy for manufacturing and is a primary component in industrial products, including fertilizers and pharmaceuticals. Today, it is also one of the most traded commodities globally. In this article, let’s delve into natural gas and the natural gas market.

What is Natural Gas and What is it Used For?

Natural gas is a fossil fuel formed over millions of years from the decay of plants and animals, compressed deep beneath the Earth’s surface and exposed to heat and pressure.

First extracted as an energy source in England in the 18th century, natural gas truly began to flourish in the 20th century, with the construction of pipelines opening up new markets worldwide.

History of Natural Gas

The history of natural gas dates back to ancient China, around 500 BC, with the first rudimentary pipelines made from bamboo. After two millennia and the commercialization process, natural gas began illuminating homes and streetlights in England in the 18th century. The United States first produced natural gas in 1816, and by 1885, the invention of the Bunsen burner allowed for adjustable flames, further exploring potential in cooking and heating.

By 2009, 8% of the remaining recoverable 850,000 cubic kilometers of natural gas reserves had been utilized. As a tradable commodity, natural gas has witnessed significant price fluctuations due to various factors, although since 2010, prices have fluctuated below the $4.00/MMBtu mark due to oversupply, increased storage, and changing demand patterns.

The chart below illustrates some significant price fluctuations since the beginning of the century and why they occurred.

Understanding the Basics of Natural Gas

Who are the Largest Natural Gas Producers?

The top 10 natural gas producers own nearly 80% of the world’s fossil fuel reserves. According to 2018 data, these regions – along with their average annual production (measured in billion cubic meters) – are:

  • United States – 766.2
  • Russia – 598.6
  • Iran – 184.8
  • Qatar – 164
  • Canada – 149.9
  • China – 138.4
  • European Union – 118.2
  • Norway – 117.2
  • Saudi Arabia – 102.3
  • Indonesia – 86.9

According to the company, the largest companies in the natural gas market are Gazprom, Royal Dutch Shell, Exxon Mobil, PetroChina, and BP.

What Influences Natural Gas Prices?

The primary factor affecting natural gas prices is supply and demand, which is determined by factors such as production volume, storage levels, economic growth, competing fuels, and weather.

Production Volume: Any disruption to production – such as adverse weather hindering drilling operations – can reduce supply and drive natural gas prices higher.

Storage Levels: Natural gas storage facilities help avoid shortages during periods of high demand and absorb excess production. If storage facilities deplete, the price of this commodity usually increases.

Economic Growth: In robustly growing economies, commercial and industrial activities tend to consume more energy, leading to higher natural gas prices.

Competing Fuels: Competition from other energy sources, such as coal or solar energy, can cause natural gas prices to decrease.

Weather: In addition to production impacts, weather conditions – such as sudden cold snaps or heatwaves – can also increase natural gas demand.

Trading Natural Gas

Natural gas can be traded in various ways, from natural gas futures contracts and options in the commodity market to ETF funds. CFD trading can also be used for speculating on natural gas prices.

Purpose of Trading Natural Gas

Natural gas is a popular commodity to trade for many reasons, such as the increasing demand for clean fossil fuels, its price volatility, and market liquidity.

Growth Potential: Energy giants like Total SA and Exxon Mobil are committing significant resources to expanding the application and utility of natural gas, a sign of their confidence in its future.

Demand for Clean Fossil Fuels: Natural gas burns cleaner and produces fewer carbon emissions than other fossil fuels such as coal and crude oil – making it a popular (and less regulated) choice in an increasingly environmentally conscious era.

Technological Developments: With technological advancements, compressed natural gas (CNG) can be transported without pipelines, opening up many potential markets for this industry.

Potential Market Volatility: While the prices of some commodities have remained sluggish since around 2010, energy assets continue to fluctuate, presenting a lucrative opportunity for traders who know how to capitalize on it.

Liquidity: As a widely traded asset, there is typically a large number of buyers and sellers active in this market. High liquidity increases the likelihood that traders can enter and exit positions at their desired prices.