Trading Natural Gas Futures - Beginner's Guide - YouTube

Greetings traders and welcome back.

Thank you for joining me again for another In Depth with Chris episode.

Today, we're going to be giving ourselves a nice little dip into

the water of natural gas. Sounds a little spooky when you

say it like that, but we are going to be focusing on natural

gas futures. We'll talk a little bit about what natural gas

is, but we're going to cover some of the contract specifications,

the margin requirements, some of the value behind the contracts

themselves, where it's traded, and even some of the things

that influence the market itself.

It's going to be an interesting episode for you

if you aren't familiar with natural gas, or a nice refresher

even if you are. Before we get going, let's show you

how you can pull up some natural gas futures on your chart as well

so you can follow along. Using the Finamark platform,

I'm going to go to the top left and click my symbol finder,

and I'm going to give myself a "/NG". After that,

I'm going to give it a click, and I will be all set and have

some natural gas futures up, 15 minutes currently,

but without further ado, let's dive on into it.

Natural gas is one of the mainstays of the energy industry.

It is used in so many different ways from electricity generation,

to industrial uses, and even powering the stoves of homes

all across the globe.

Now, if this is the first time that you've even heard

about natural gas, the world is about to open even further

because we're going to discuss how natural gas can be traded

through the use of futures contracts, my personal favorite.

So what is natural gas?

Where in the world does it come from? Well, it forms organically,

just like our other fossil fuels, over millions of years from

decomposing plant and animal matter. This plant and animal

matter is buried in sedimentary rock layers deep in the earth.

Once formed, the gas tends to migrate through the pore spaces,

fractures, and fissures, in the sediment and rock, leaving

it for us to collect. As a commodity in an energy source, natural

gas takes the third spot on the list of most used energy

sources, just after oil and coal. Its use has steadily grown

over the years, and it's expected to become the second most

used energy source in the next 10 years, surpassing coal.

As an energy source, natural gas is the Earth's cleanest burning hydrocarbon.

Its combustion does not produce

ash residues, sulfur oxides, and only negligible nitrogen. This

sets it apart from all of the other fossil fuels. Prior to

entering the market, raw natural gas undergoes processing,

which purifies it into methane with some ethane.

The United States is the world's largest producer of natural

gas, followed by Russia, Iran, and Canada in that order respectively.

These countries then trade the excess natural gas that they

produce and export it to other countries around the world for income as well.

The way that it's transported is through either pipelines

or as a liquefied natural gas, which is referred to as LNG,

hence the name liquefied natural gas. The liquefied natural

gas is then stored in a really cool cryogenic chamber so

to speak, and then it's transported on large container ships.

Natural gas has been a major source of energy in the world

since the 1970's, even though it's been used quite a lot longer than that.

In the U.S., our first commercial use began somewhere around the 1820's era.

Natural gas contributes to about 31.8% of the United

States's energy use, which is very, very respectable by all

standards. Today, we see natural gas used in so many different ways.

We previously mentioned that people are using it all around

the world regularly for things like cooking, as well as heating and cooling.

Now, we're going to take a moment to talk about the structure

of the natural gas market;

How it's made up, how it operates, and where it really operates from.

There are dozens of natural gas trading hubs around the world,

though the most developed ones are in North America, Western Europe, and North Asia.

This is because these regions specifically have dense pipeline

networks compared to others, allowing for easier and faster

transportation among the surrounding countries. In the U.S.,

the most dominant natural gas hub

is going to be the Henry Hub, which is located here in Erath,

Louisiana. I may be pronouncing that wrong because I

am terrible with location pronunciations. Thanks to its excellent connectivity

though, the Henry Hub itself, sitting there in Louisiana,

it has so much storage and facilities all around its central

location. The Henry Hub actually is the official delivery

location for natural gas futures contracts that are traded

on the New York Mercantile Exchange, which we all refer to as the NYMEX.

The Henry Hub is our special boy here.

He's the one that we're going to want to remember over there in Louisiana.

The settlement prices at the Henry Hub are then used as benchmarks

for the entire natural gas market in North America, as well

as some parts of the global LNG Market, which once again

is the liquid natural gas market. In Western Europe, the two

most important trading hubs are the National Balancing Point,

which we refer to as the NBP here, and that is located in

UK. Then we also have the Title Transfer Facility, which

here we go, the TTF, and that is in the Netherlands.

They set the settlement prices for the region. While in Asia,

we have, in North Asia that is,

we have a Japan-Korea Marker Index, which is oftentimes referred to as JKM.

Futures contracts are one of the most popular, and my personal

favorite, way to be involved with speculative trading around natural gas.

A futures contract is essentially just an agreement to buy

or sell something, in this case natural gas, at a future specified

date. The idea behind a futures market is that buyers and

sellers are speculating, or hedging on, price movements and

looking to lock down a profitable price now for trading at a later date

to avoid any potential disruptions. The world's largest futures

contracts for natural gas futures are traded at the Henry

Hub, like we were previously talking about, which is traded

at the NYMEX, the New York Mercantile Exchange. The NYMEX is

owned and operated by the Chicago Mercantile Exchange, which

is often referred to as the CME Group.

This market is not without its share of volatility, despite

the ever increasing liquidity that natural gas has proven

over the years. As with most commodities listed on futures

market, it's not always expected to take physical delivery

of natural gas when we're trading it.

In fact, that's highly unlikely.

We generally are looking to take advantage of the value of

natural gas going up or down, and then sell our futures contract

or buy our futures contract out before obviously, we need to

take delivery. The idea is to take advantage of those price

changes and then offer it to someone who's interested in taking delivery potentially.

Here we have some specifications

from a natural gas futures contract, specifically the one

that we pulled on screen at the beginning of the video because

this is under the symbol "NG", obviously coming from our Henry Hub.

What we have here is a contract unit of 10,000 million

British thermal units. What a number, huh? 10,000 million British

thermal units. Then we have a price quote, which is going to be in U.S.

dollars and cents per MMBtu.

The minimum price is going to to be .001 per MMBtu, and that's

going to be equivalent to $10.

Minimum price fluctuation is going to be our $10.

Remember, if you want to see the entire contract specifications

such as the trading hours, as well as the termination of trading

rules, make sure you check out our blog post where we have

all of this information there for you.

An introduction to natural gas futures wouldn't be complete

if we didn't talk about some of the price movement fluctuations

that happen and how they work.

The price of natural gas fluctuates in increments of .001.

We saw this on the previous slide when we were talking about

the contract specifications.

These increments are referred to as ticks, which represent

the smallest movements that are made by a futures contract.

Us traders want to use these ticks to determine our profit or loss

if it doesn't go our way, by measuring the tick movements

between our entry price and the actual price of the commodity

by the settlement date.

If we get in and it goes up, and we have multiple ticks

in our favor, then we're doing alright. The broker that

we use will often show us how to calculate the ticks' movement

and do it for us, so don't feel overly boggled down with the whole math side

of things, but it is good to still have an idea of how this stuff works.

If the tick value for a natural gas futures contract is

$10, like we saw on the previous slide,

that means for every contract, a one tick movement from

the entry price will yield us a profit of $10,

whereas a one tick loss from our entry price will give us a $10 loss per tick.

10 ticks, we have $100. One tick, we have $10. Against us one tick, then we lose $10.

It's also important to consider the number of contracts being

held. If we say that we have a 10 tick movement, but we're holding five contracts,

then our profit instead of being $50, would

be $500 because that's five contracts times the 10 ticks at $10 a tick.

It should also be worth mentioning that there are e-mini

variations of the natural gas futures contract as well, which

means a cheaper alternative for the same market.

We understand how much it's worth, now

let's talk about how much we need, and that is referring to

the margin that is required. Margin refers to the minimum

amount of money that is needed in our trading account for

day trading natural gas contracts. These amounts tend to vary

based on the specifications of our futures broker, so keep that in mind.

The numbers that you see here will not be numbers across the board.

They are just numbers that I saw at the time of recording this video

off of an undisclosed broker.

With that being said, there are different types of margin out there.

There's initial margin, and then maintenance margin. The initial

margin is going to be the amount of money that we need in

order to open a contract for natural gas,

and that's going to be $1,600 approximately.

Once again, that is approximately. Then the maintenance

margin. The maintenance margin is going to be somewhere around

$1,450, but once again, this is approximate. This will

be the amount of money that we must maintain in our account

while our position is open to keep the position open.

If we were to unfortunately fall below this $1,450 in this

scenario in our account balance, the broker would do what's

called a margin call, where they give us a call and say, "hey

we must immediately bring our account back up", or they will

liquidate our position for us. The maintenance margin is the amount.

that we must maintain in order to keep the position open once it has been open.

One of the common underlying factors that all traders have

is the desire to make money, and the way that we do that is

by staying ahead of the market.

It's important to talk about some of the market factors

that push the price of natural gas around.

The first one is going to be seasonality. Changes in weather

conditions play a crucial role in determining the prices

of natural gas because it affects demand and supply. This

allows gas producers to properly adjust their production

rate, manage storage facilities, and look to reduce their financial

risks when they pay attention to all these things. Accommodations

must also be made for unexpected disruptions, like necessary

pipeline maintenance or even political turmoil.

Then we have consumption patterns. Heating and cooling are

the main drivers for natural gas consumption patterns.

This is especially the case in the United States specifically.

For instance, the demand for natural gas tends to rise strongly during

the winter, as more people look to stay toasty

in their homes, and they use natural gas as part of their heating systems

Then we have price of competing fuel based energy sources.

The price of oil and coal will undoubtedly affect the price

of natural gas. More recently, renewable energy sources such

as solar and wind have started to affect natural gas prices

as well, but it is worth noting that natural gas is considered

to be one of the cleanest, if not the cleanest, fossil fuel

amongst the masses that there is, due to the way that it burns.

Then, we have world events. War, financial crises, pandemics,

such as the coronavirus, elections, and all that stuff will

influence the demand and supply of natural gas as well.

We always want to pay attention to these things

if somehow it has some type of disruption in the supply chain.

Then we have the EIA report, which stands for the Energy Administration.

These weekly reports track the supply levels of natural gas,

including what's in storage.

It's important to be aware of this because this is a direct

relationship to the supply scenario, which means an overwhelming

supply could unfortunately hurt the demand.

In conclusion, natural gas futures can be as good as any to

start exploring the futures markets.

It may not be the number one most liquid market out there,

but the trend for natural gas has been undeniable.

We're watching it grow and overtake things left and right,

and what better time to learn a market then during its growth

stage so you can become familiar with some of the mannerisms

of the way the market moves, and what causes that particular

market to go up and down, to be ready for the day when natural

gas may be number one. Until next time, thank you for

joining me again, and remember folks, that if you think you

have what it takes, you check out that Gauntlet Mini and you

show me you have what it takes.

Until next time, please click the like and subscribe button

below and I will see you soon.

Cheers folks, over and out.