Are you looking to make some money off of natural gas futures? Futures trading can be a great way to earn money. Like investing in stocks, bonds, real estate, and various other assets, the basic principle is simple. Buy low and sell high. Futures are a bit different in the sense that you’re buying now, but you won’t get delivery of the product (in this case natural gas) until later. This means you’re speculating on price changes in the future.
Confused? Let’s say you believe that natural gas prices will increase substantially over the next six months, and let’s assume you’re one of a few people holding this particular view, and gas prices overall are pretty stable. You could buy some tanks of natural gas and store them, and then sell them later on, but that’s not very convenient, is it?
You could also invest in natural gas companies, but that means that you’ll have to conduct an in-depth examination of the company (or companies) themselves. If you miss something, stock prices in the natural gas company could decline even if natural gas prices go up.
So how can you invest in natural gas and make money off of rising prices? One potential solution is a natural gas future. With a future, you will basically pay for natural gas now, but the delivery of the actual natural gas will not occur until a pre-determined point in time in the future, say six months. Prices will be agreed upon now, and are generally set with both current prices and future expectations in mind. In practice, markets determine the price of futures based on what investors believe will happen in the coming months.
So, you can buy a natural gas future, and be guaranteed delivery at a later date. Then, as prices rise you’ll still own the contract for the natural gas, and someone who wants to take delivery of the natural gas can buy the contract from you.
Of course, in practice most investors who buy futures for commodities don’t actually want to take delivery of natural gas. For this reason, many futures brokers allow you to settle cash. What does this mean? It means that the futures broker will agree to pay the cash difference, should prices rise. If prices for the given commodity fall, however, you’ll have to pay the broker for the amount that prices fell.
This probably all sounds very complex, but in practice it is very simple. Basically, you buy a contract based on the prices and expectations of natural gas or another commodity, say corn. You and the broker establish an expiration date, meaning that when the contract expires, the difference in price must be settled between you and the broker. (By the way, you can sell your contract before it expires to another trader, or possibly back to the broker.)
Investing in Natural Gas Futures
So how can you actually make money off of futures? Understanding how a market works doesn’t guarantee that you’ll be able to tap into all the potential profits of that market, after all. The first thing you need to do is learn everything you can about how the industry works. Paying attention to gas futures news is a great way to get started. Watching and closely studying a natural gas futures chart is also another great step.
One of the most important things to figure out is who the customers for natural gas are, and how they use natural gas. For example, some city governments use natural gas to power local public transportation. In many regions of the United States, and indeed the world, natural gas is a popular option for heating. With heating, we can deduce that natural gas use will be seasonal. More people will be using more natural gas come winter time than they will in the summer. This all concerns demand.
So what about supply? Where does natural gas come from? We’re not going to give you all of the answers, but the United States, Canada, Russia, and Iran are among the biggest suppliers. What technologies are impacting the extraction of natural gas? Fracking has allowed numerous companies to tap into ever greater supplies and resources of natural gas.
On and on the list goes. Understanding any market is inherently difficult as there are so many factors involved. Look at the list above, we just touched on a few things like weather, consumer trends, and technology, and already the analysis is getting very complex. By studying markets in-depth you can increase your chances of turning significant profits. So make sure you take some time to really dig into the nuts and bolts of the natural gas industry, because along the way you’ll increase your chances of making a profit off of natural gas futures.