Natural gas traded as a commodity is different from other materials, in that it is not readily transported globally. This means that, for instance, the European market may trade differently from the market in the United States. Much has been done to develop liquefaction and facilitate energy exchange, but inevitably such processes add cost and complication, compared to simply delivering the product locally via a pipeline.
This daily chart shows the volatility of the exchange traded commodity (ETC) gas on the spread betting market. There are several other ways to bet on the price of natural gas, including betting on the direct commodities market prices.
The major influences on supply and demand include both global and domestic economies, therefore to the extent that there is interchangeability between different fuels, you can also expect the price of oil to have an influence. Weather will directly affect the demand, particularly in winter because of heating, but also through the year as natural gas becomes more favoured than coal for electricity production. The continued development of natural gas powered vehicles has proved of little importance to date for the demand.
Meanwhile, supply has been significantly impacted by the newer technologies of horizontal drilling and fracking, and this has led to a significant fall in price in recent years.
Whenever there is an increased demand for natural gas, causing the price to rise, then the competitive fuels are used more, thus regulating the extent to which demand can control the economics. Electrical generation is one of the industries where there is a good chance of “fuel-switching” in response to energy prices, facilitating this equalization process. However, it is seldom as easy as throwing a switch to change between fuels, which should mean that there will never be complete parity.
For spread trading purposes, some of these influences will be over too large a timescale to matter. As always with trading, you should research the technical analysis to develop ideas about short-term price movements.
Natural Gas Rolling Daily
Looking at the price of the exchange traded commodity (ETC) of natural gas, as this is available for daily rolling spread bets as well as for three terms of futures bets, the current quote is 12.918 – 12.982. With a bearish outlook, you might look to place a bet on the short side, selling at 12.918 for a stake of £75 per point. Because of the low price of the quote, you have to compensate with a larger stake per point, and you will need to review this for each of the types of natural gas that you may choose to spread bet on, as the point values vary significantly.
Say the price goes down to 9.418 – 9.482 and you close your short bet for a profit. The closing price for a sell bet is the higher of the pair, 9.482. Taking this away from the opening price of 12.918, your point gain works out to 3.436. With a stake of £75 per point, your cash gain is £257.70.
Not all of your bets will work out, no matter how good your analysis or how clear the trading signal. The markets sometimes seem to have minds of their own. Perhaps in this case the price went up to a level of 14.668 – 14.732 after you placed the bet, and you decided to quit the trade and cut your losses. The closing price would be 14.732, so taking away 12.918 you would have lost 1.814 points. Multiplying by £75, this comes out to £136.05 lost.
With a stop loss order, you might have saved some of the loss. It certainly saves you the effort of keeping a constant check on the market price. Your spread betting provider might have closed your bet for you when it went up to 13.968 – 14.032 if you had used a stop loss order. With a closing price of 14.032 and an opening price of 12.918, in this case you lost 1.114 points, which with a wager of £75 works out to £83.55.
Natural Gas Futures Style
Imagine that this time you think the price of natural gas is going up. As you think it may take several weeks or months for the price to go up to your target level, you decide to place a futures style bet which means you have no rollover costs while you hold it open. The far quarter futures bet is currently priced at 12.926 – 13.082, so you stake £40 per point at the buying price of 13.082.
The market runs the right way for you, and eventually you close your bet for a win when the quote is 18.176 – 18.332. The price has risen all the way from the opening of 13.082 to the closing of 18.176, which is a total difference of 5.094 points. Multiplying by your stake, your winnings work out to £203.76.
The market can fluctuate unpredictably, particularly when you are expecting to hold onto a bet for some time. If the price went down to 11.176 – 11.332, you might find that your trading system told you to close the bet and accept a loss, rather than risk a greater loss. You would close your bet at 11.176. Taking this away from 13.082, the point difference this time is 1.906. £40 times 1.906 is a loss of £76.24.
You can also get your spread betting provider to watch the prices for you, and even close your bet if the loss is mounting. Using a stop loss order, you could find that your position was exited when the price dropped to 11.876 – 12.032. The closing price this time would be the selling price of 11.876. You opened your spread bet at 13.082, so taking away 11.876 your loss would amount to 1.206 points. With a stake of £40 per point, using a stop loss order your loss was kept down to £48.24.