Natural Gas Spread Betting
Natural gas measured in million British thermal units (MMBtu) has been in a downtrend lately with excess supply outstripping demand due to mainly the emergence of shale gas and the global recession which has pushed prices down. This is because the main users of Natural Gas are industrial factories and power stations which use about 58% of all Natural Gas. As the economy and manufacturing sector took a dive, so did demand for Natural Gas, however there is speculation that gas will experience a similar recovery to that seen with oil. In fact Gas prices have fallen from well over $13 per thousand cubic feet (mcf) in mid-2008 to just above $3 per mcf.
Trading the Natural Gas Price by Christopher Beauchamp IG
Gas spread futures contracts are available on a quarterly basis. Capital Spreads is currently quoting the September contract at 3.224 – 3.274, the minimum stake is GBP1 per point with each tick representing a tenth of a cent movement in the cost of one MMBtu. As the gas market is very volatile you will need to put an upfront margin of 500 times the stake to open a position in the Natural Gas contract. Note that gas is much less polluting than oil. You can spread bet Natural Gas in pounds, dollars or Euros per point.
It is also interesting to see that shale gas is also putting further downward pressure on gas prices. Just to bring this into perspective in 2000 shale gas accounted for just account 1% of US output of natural gas. This rose to over 35% this year as extraction technology improved. It is estimated that there are well over 482 trillion cubic feet (tcf) of technically recoverable resources of shale gas in the USA alone.
Did you know? Shale gas is natural gas formed from being trapped within shale formations and has become an increasingly important source of natural gas over the past decade – particularly in the United States.
Trading Natural Gas
Commodities are known to be volatile, and natural gas is no exception. In fact, it is one of the more volatile commodities that you can find to trade in, and this is reflected in the spread betting prices that you will find from your broker. Furthermore difficulties in transporting gas means an inefficient market with substantial disparities between prices in different regions.
The story of natural gas can be a confusing one, with different experts citing different reasons for the market movements. Spread trading gives you the opportunity to control risk more easily than when trading directly on futures, so it represents a great way to take advantage of the volatility for profit.
Natural gas with its recent price fluctuations has been puzzling pundits. On the one hand, it looks like a great deal, and time to invest in it. On the other hand, those who did so have found that the price continued to fall. Also, as we have noted there are widespread disparities in prices and while the Henry Hub index in the USA is presently trading at about $4 per thousand cubic feet (mcf), Japan pays $17 per mcf due to the transportation cots while Eastern Europe pays some $15 per mcf for gas from Russia. There is no doubt that taken from an overall perspective natural gas is undervalued, but that tells you nothing about when the price may correct.
Much touted as the way of the future, natural gas is certainly cleaner than many alternative carbon-based fuels, such as sulphur laden coal, but the fact remains that it is a fuel based on carbon and therefore a contributor to carbon dioxide emissions and global warming. During the next decades it will have a strong place for energy supply, but in the end its use must be reduced.
One reason that natural gas has plummeted so much in price is because of new extraction processes. Natural gas comes from two chief sources – firstly it can be emitted from oil wells, mainly because the pressure is reduced on the oil as it is extracted and that releases the gas, which results in the well-known image of “flaring” the gas from the top of the well. It seemed the easiest thing to do with the unwanted gas, which would have been expensive to capture and pipe to a useful location, but modern economics and pollution have changed that view. The second source is wells which are drilled specifically to dry natural gas locations underground.
Shale gas and shale oil refer to deposits of natural gas which are trapped within shale rock. Normally, shale rock will not permit fluids or gas to flow through it without external stimulation. With the discovery of ways of “fracking” for natural gas, that is breaking up the underground rock to release pockets of gas, and ways of sideways drilling which allows a far greater area to be covered from a single well, at present the market is seeing a surfeit of supply, and this along with a general downturn in the world economies has been blamed for the tumbling values.
YPF’s Belgrana Plant in Argentina
A recent study concluded that increased shale gas production in the US and Canada could help prevent Russia and Persian Gulf countries from dictating higher prices for the gas it exports to European countries. Speaking recently on the subject of shale gas production, Bill O’Neill, chief investment officer for Merrill Lynch Wealth Management, said that in spite of production shutdowns, the shale gas revolution means production will likely continue to grow at 4.4 billion cubic feet per day. Trading shale gas specifically, however, is difficult as it falls within the overall pricing of natural gas – in the US this is the Henry Hub Natural Gas spot price.
USA POTENTIAL: Estimated technically recoverable shale gas resource: 1,161 trillion cubic feet
Estimated technically recoverable shale oil resource: 48 billion barrels
Biggest basins in the USA include Bakken, Barnett, Eagle Ford, Fayetteville, Haynesville, Marcellus and Woodford
Source: EIA, June 2013
UK POTENTIAL Estimated technically recoverable shale gas resource: 26 trillion cubic feet
Estimated technically recoverable shale oil resource: 700 million barrels
The UK’s declining production from the North Sea has left it dependent on energy imports.
Source: EIA, June 2013
ARGENTINA POTENTIAL Estimated technically recoverable shale gas resource: 802 trillion cubic feet
Estimated technically recoverable shale oil resource: 27 billion barrels
Source: EIA, June 2013
Argentina has the largest recoverable shale gas reserved in the world after the USA and China.
Lately, the principal benchmarks for oil and gas in the US; West Texas Intermediate and Henry Hub – have been impacted by the excess of new supply created by shale drilling. But for the spread better, the fact that gas prices are volatile is the chief reason for considering trading on them. If the prices continue to fall, or stabilize and rise, it makes no difference as you can bet either way. You must spread trade with caution, bearing in mind that prices can alter drastically in a short time, possibly from news of another discovery; and prices can change with seasons, depending on the weather. Take all possible precautions to protect your capital with realistic stop loss levels, and use technical analysis to detect the underlying market sympathies on which you can trade.
Argentina is the world’s number three in terms of shale gas reserves – just behind the US, which has reserves of some 24 trillion cubic metres, and China, which has reserves of around 36 trillion cubic metres, according to the American Energy Information Administration.
Natural Gas Spread Betting
The current quotation for natural gas, due next month in a futures style bet, is 3428 – 3458. When you are spread trading natural gas, you need to be aware that the price is volatile, and keep a close eye on what it is doing. On a typical day, the range of price may be more than 100 points.
Despite the fact the price has dropped a lot in recent months, you may find from your analysis that it is likely to drop some more, and decide that you need to place a sell bet, taking a short position. This spread betting company allows a minimum bet of £0.5 per point, and a minimum gap to a stop loss position of 45 points, or 150 points if you want a guaranteed stop loss. These figures should serve to indicate to you how volatile the price is expected to be.
With all things considered, you makeup your mind to place a short bet for £2.50 per point, and this is placed at the selling price of 3428. Imagine that after a few more weeks of price declines, the quote drops to 2956 – 2986, and you decide to close your bet and take your profit. You work out how much you have made.
- The bet opened at 3428
- The bet closed at 2986
- The number of points made is 3428 less 2986
- The total number of points gained is 442
- To work out your winnings, you need to multiply this times your stake
- You won 442 times £2.50
- For a total gain of £1105
Not all spread bets work out, and it may be that after you placed this bet the market turned around and the price of natural gas increased. To be successful at trading, you need to act quickly to minimize any losses you face, so when the quotation goes to 3532 – 3562 you decide to close the bet and avoid losing any more. You can now work out how much you have lost on this bet.
- The bet opened at 3428
- The bet closed at 3562
- The number of points that you lost is 3562 less 3428
- Which means the total number of points that you lost is 134.
- Once again, you can apply this to your stake to see how much you lost
- 134 times £2.50 is £335, so this is your total loss.
Trading natural gas is not for the faint of heart, as you can see from the figures. Although there are good opportunities for profit to be had, it is probably best to learn spread trading on a different commodity or financial security first, so that you do not risk having your account wiped out on a wildly swinging bet. However, once you’re confident in your trading strategy and in your manipulation of the trading interface, there is no reason that you cannot look for large profits from spread betting natural gas.
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