INTRODUCTION
It is true that as far as trading in energy commodities is concerned, oil has been the most popular for many years, and by far. And yet, it is also true that there are other options if we want to maintain a variety in trading or otherwise diversify. It is about natural gas trading, which in fact for almost a year has entered our lives for good due to the energy crisis and much more after the cuts in the supply of natural gas made by Russia to the countries of the Eurozone.
WHAT IS NATURAL GAS?
Natural gas is considered a “natural form of energy” that can be used without much processing and burns perfectly in the right appliances. It is the friendliest conventional fuel to the environment and to humans. In Europe its use was discovered in 1659 (England) and gradually its use spread but remained limited because there was no way to transport it over long distances.
Industrial activity in the years of its great development was based on oil, coal and electricity. From the 1920s and with the use of pipelines to transport it and especially after the second world war, its use skyrocketed.
Today it is estimated that 25% of global energy consumption comes from natural gas. Let’s not forget that many large companies in the production process have already chosen natural gas for their operation, and as a fuel for cars it has been imposed to a large extent as it is considered cheaper and safer for the environment.
It is a fossil fuel – that is, it is extracted from the ground – and is mistakenly considered a by-product of crude oil like gasoline, but it is not a product of its processing, it is simply found together with oil reserves.
After the extraction process from the ground it is processed into gas and liquid (LNG) form and to ensure that it meets all the necessary specifications (before distribution and consumption) it is transported to special factories to get the relevant approval and this is a process which costs and has a big effect on its price. Its use is generalized for heating and electricity production, eg cooking with the appropriate gas stoves.
WHAT AFFECTS NATURAL GAS PRICE?
As with all energy commodities the law of supply and demand is a determining factor in the fluctuation of the price of natural gas. Below we present the three main causes that over time affect the price in natural gas trading. We should of course note that at the time of writing (summer 2022) the price of natural gas has skyrocketed to absurdly high prices for mainly political reasons and we refer to the decision of Russian Federation (one of the largest producers of natural gas in the world) to cut to 20% the supply to the Eurozone countries in response to the measures taken against it due to the invasion of Ukraine in February 2022.
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- Extraction process and examined – treated – stabilized. As mentioned above the process of extracting the fuel (which itself requires a lot of energy consumption) and much more the quality processing to get the certification for distribution and consumption requires large amounts of initial investment which can usually be met by state companies and then very costly procedures.
- Seasonal patterns and weather conditions. During the winter or in general when the temperature is low, the demand for heating increases and at the same time raises the selling prices of natural gas. The demand in the warm seasons decreases but remains high due to increased electricity consumption for indoor air conditioning.
- Accidents and natural disasters. Accidents during extraction, treatment and distribution significantly affect supply and demand and consequently the price of the trading commodity.
CONSUMPTION AND THE LAW OF SUPPLY AND DEMAND
The country with the largest consumption of natural gas in the world is the USA (it consumes 22% of global production
and at the same time it is also the first country in the production of natural gas with 2017 official data), followed by Russia, China, Iran and Japan. Germany (8th in the world) has the largest consumption within the Eurozone countries through the Nord Stream1 pipeline from Vyborg, Russian Federation to Greifswald, Germany.
The most important announcement (Natural Gas Storage Report) for natural gas traders comes from the DOE (Department of Energy), it is published weekly and is a detailed report on natural gas storage levels. This information gives a good insight into global supply and demand levels which are critical in price formation.
NATURAL GAS TRADING (CFDs)
Natural gas trading was until recently a rather complicated process, but today traders can speculate (or at least try!) with CFD contracts through which they can open buy (long) and sell (short) positions. CFDs (Contracts for Difference) – very common nowadays – are essentially contracts between the trader and the broker that refer to the difference in the price of a commodity and through them a trader can invest without actually owning the particular commodity.
EPILOGUE AND THE POLITICAL PARAMETER
Natural gas trading has no essential difference with any other instrument, whether it is a currency rate, a commodity or shares, the basic rules and management are the same. The same strategies apply, the same time frames, it’s the same logic whether someone is swing or day trader etc etc.
But, as we mentioned in the second paragraph, in this time period (summer 2022) there are some special conditions in natural gas trading with the energy crisis that started at the end of 2021 (rise in energy prices worldwide in direct relation to the Covid 19 pandemic) having reached threatening levels mainly for the second largest western economy, the Eurozone. One could say that since this is a special condition we just have to wait for things to normalize sooner or later. This view is not wrong…
But there is a difference: For some time (which can even reach two years from today) and as long as the Eurozone economy does not have the technological means ready to replace dependence on Russian natural gas, then its supply will be able to be turned into a political weapon against her at every opportunity. This is something that should be kept in mind by every trader who wants to deal with this particular trading.
Simply put, very large fluctuations in price even from month to month is a very likely scenario. But every bad thing has a good side: Close monitoring of the news in this energy “war” as well as the analysis of the international political situation can not only protect (especially long-term traders) from big losses but also give scope for significant profits in natural gas trading.
Happy trading to everyone!
Demetrios
forexart73@gmail.com
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