Natural Gas

Natural gas trading can be done via physical exchanges of gas on spot markets or financial derivatives such as CFDs, futures and options. This guide will go over what natural gas is and how to trade the commodity, with information on the factors that impact prices, investing tips, trading hours, and popular strategies. Our experts have also reviewed and ranked the best natural gas brokers for UK traders.

What Is Natural Gas Trading?

Natural gas is one of the most popular commodities traded globally. Due to its natural abundance and its many uses, from heating buildings to cooking, the natural gas market is seen as extremely lucrative. This type of trading can be done via physical trades, swaps, and financial derivatives.

Importantly, trading natural gas involves speculating on price changes. Although it is popular to trade simply for profit, it is also common for traders to use natural gas to diversify their portfolios or to hedge against price fluctuations.

In the United Kingdom, the price of natural gas is primarily determined on the Intercontinental Exchange (ICE) and the National Balancing Point (NBP) gas trading platform. The ICE offers futures contracts for natural gas, while the NBP is the primary spot market for natural gas in the UK. Alternatively, many of the best natural gas brokers offer CFDs and spread betting, which are popular with retail traders.

History Of Natural Gas Trading

The history of gas trading in the UK dates to the 1960s when natural gas was discovered in the North Sea. During this time most natural gas was sold through long-term contracts that linked the price of natural gas to the price of oil. This was known as oil-indexation and was common when natural gas was mainly transported by pipelines.

In the 1980s, the UK government began to deregulate the natural gas market and privatise the BGC. The National Grid was established to operate the natural gas transmission system, and the BGC was split into separate companies for production, transportation, and distribution. The pricing of natural gas gradually switched to hub pricing – where supply and demand determine the price. In 2021, hub pricing was used for 77% of gas volumes.

The National Balancing Point (NBP) was established in the late 1990s. The NBP is a virtual trading point that is also used as a reference point for pricing other natural gas contracts and products in the UK. The NBP has contributed to the switch away from oil indexation.

September 2009 saw the European Union (EU) introducing the Third Energy Package, which aimed to further liberalise the natural gas market and increase competition. This led to the development of new trading platforms, such as the Intercontinental Exchange (ICE).

Why Trade Natural Gas?

For retail traders, natural gas offers an exciting profit-making opportunity due to the extreme volatility of gas markets. Due to this risky environment, the potential profits from speculating on gas prices are high. Arbitrage of natural gas is also common in the UK as it is legal and allows traders to benefit from differences in gas prices.

The US dollar is the global reserve currency so natural gas is usually sold in USD, including on ICE. However, gas is sold in pounds sterling (GBP) at the National Balancing Point (NBP) gas trading platform.

Natural Gas Price Chart

Factors That Influence The Price Of Gas

Like most volatile commodities, there are several factors that can impact the price of natural gas:

Supply & Demand

The balance of supply and demand is one of the most important factors that can affect natural gas prices. If demand is high and supply is low, prices will typically rise. Conversely, if demand is low and supply is high, prices will typically fall.

Gas supply can be greatly influenced by the political and economic situation of producer countries, but it can also be affected by environmental factors or by the discovery of large gas reserves. Demand is affected by a wide range of factors, from weather to the adoption of renewable power and energy-efficient architecture.

• Weather: Weather can have a big impact on natural gas prices, particularly in the winter when demand for natural gas to heat homes and businesses increases. Colder-than-normal weather can lead to higher prices, while warmer-than-normal weather can lead to lower prices.
• Storage levels: Storage levels also play a role in natural gas prices. If storage levels are low, prices may rise as supplies are scarce, while high storage levels can lead to lower prices.
• Production: Changes in production levels can also affect natural gas prices. If companies experience low costs and production levels increase, prices may fall.
• Political and economic factors: Political and economic factors can also influence natural gas trading prices. For example, geopolitical tensions or instability in natural gas producing regions can lead to higher prices, while increased investment in natural gas production infrastructure can lead to lower prices.
• Technological advancements: Technological advancements can have an impact on natural gas prices. For example, the development of new extraction techniques may lead to lower prices; while the development of new technology that is fuelled by natural gas could spark high demand and higher prices. Advances in renewable energy sources or renewable household heating technologies are also likely to dampen demand for natural gas if these are widely adopted.

How To Trade Natural Gas

There are several methods of trading natural gas:

• CFDs: Most retail traders will use a derivatives product like contracts for difference (CFDs) to speculate on natural gas prices, since these have low capital requirements and there is no obligation to take possession of the underlying asset. CFDs are a simple bet on the direction natural gas’s price will move, with the trader either earning or paying the difference in the asset’s price between the start and end of the contract. Traders can also make leveraged trades with CFDs, allowing them to multiply their potential profits and losses.
• Spread betting: Offered by IG and other UK brokers, spread betting is another favourite derivative among retail traders as it allows leveraged bets on the price movements of natural gas and other commodities and profits are often tax-exempt.
• Futures: Futures contracts can be traded on exchanges such as the Intercontinental Exchange (ICE) and the New York Mercantile Exchange (NYMEX). These contracts allow traders to lock in prices for future deliveries of natural gas and can be used for hedging or speculative purposes. Generally, natural gas futures are the domain of energy brokers and institutional investors.
• Options: UK traders can also trade natural gas options contracts on the ICE and NYMEX. These contracts give traders the right, but not the obligation, to buy or sell natural gas at a specific price and date in the future.
• Spot trades: The spot market is a market for the immediate delivery of natural gas. The National Balancing Point (NBP) is the primary spot market for natural gas in the UK. This method of trading requires traders to store the gas before they can sell it on, making it impractical for individual traders.
• ETFs: UK traders can also invest in exchange-traded funds (ETFs) or exchange-traded notes (ETNs) that track the price of natural gas. These funds and notes can provide exposure to natural gas prices without the need for traders to physically purchase or store natural gas.
• Over-the-counter (OTC) market: The OTC market is a market for trading natural gas contracts directly between two parties, without the use of a formal exchange.
• Swaps: Natural gas swaps are agreements between two parties to exchange cash flows based on the difference between the price of natural gas at the time of the agreement and at a future date.

Pros Of Trading Natural Gas

• Liquidity: The natural gas market is liquid, meaning that there are many participants and a large number of trades taking place, making it relatively easy to buy and sell natural gas contracts. This can also help UK traders find competitive prices at natural gas brokers.
• Inflation hedge: Natural gas is a good inflation hedge as the price of natural gas tends to increase when inflation rises, which can provide a potential source of returns during inflationary periods.
• Trading vehicles: There are multiple investment vehicles that can be used to trade the price of gas, with CFDs and spread bets particularly popular with UK traders.

Cons Of Trading Natural Gas

• Volatility: Natural gas prices can be volatile and subject to sudden price movements due to supply and demand factors, weather, and geopolitical events.
• Regulatory risks: Changes in regulations can have a significant impact on natural gas prices, which can make it difficult to predict price movements, especially over the long term.
• Environmental concerns: Given its impact on the environment, some traders may prefer to invest in commodities with fewer challenges from an ESG perspective.

Strategies

Many well-known strategies are suited to natural gas trading. Strategies can make or break an investment, so it is important to practise them and choose wisely. You can also combine strategies to curate your system own.

Trend Trading

One of the most basic trading strategies simply involves identifying which direction the momentum of a price movement lies and following it.

This may involve technical analysis based on reading trends on price charts, fundamental analysis based on your knowledge of external factors’ influence on gas prices, or a combination of the two.

Range Trading

This popular strategy involves identifying the areas of support and resistance at the lower and upper levels of an asset’s price movements over a specific timeframe.

Since prices tend to bounce upwards at support and fall when they reach resistance levels, this short-term strategy can be a profitable way to speculate on natural gas prices.

Spread Trading

Spread trading is where a trader buys and sells natural gas contracts at different delivery months or at different locations with the expectation of profiting from the price difference between the contracts.

This strategy can be used to take advantage of price discrepancies between different natural gas contracts, such as between the NYMEX and ICE.

Scalping

This strategy involves the trader buying and selling natural gas contracts within a short period of time, with the goal of making small profits on each trade. Scalping can be used to take advantage of ultra-short-term price movements in the natural gas market.

Comparing Natural Gas Brokers

Each trader will have their own set of requirements when looking for a broker to trade natural gas, but these are some basic factors to consider when comparing different platforms:

• Fees can be a dealbreaker for online traders as natural gas brokers that charge a lot make it more difficult to profit from your trades. The most cost-efficient brokers have a tight spread, low or no commission, and no inactivity fees or other hidden charges.
• Security should be a high priority – find a regulated broker with reliable safety measures, such as negative balance protection. If you opt for natural gas brokers that are not regulated by the FCA, make sure they are licensed with another reputable agency, such as the CFTC or CySEC.
• Range of assets is important for many traders who want to branch out and trade other commodities, forex or stocks as well as natural gas.
• Customer support is key if you have any issues with your account. The best natural gas brokers offer live support, at least during working hours if not 24/7.
• Demo accounts and educational materials can help traders develop winning natural gas trading strategies without risking any of their own money. Beginners can then upgrade to a real-money account when they feel ready.
• Added features like copy trading, robots and signals can be useful tools as they allow traders to execute trades automatically according to their choice of parameters, or those of a master trader.

Natural Gas Trading Hours

• NBP: 8:00 am to 4:30 am GMT Monday – Friday
• ICE: This is a global exchange that operates in multiple markets. The trading hours for natural gas futures and options contracts on ICE vary depending on the specific contract and the location of the exchange. The trading hours for natural gas futures contracts on ICE Europe are from 8:00 am to 4:30 am GMT on weekdays. The trading hours for natural gas futures contracts on ICE Futures U.S. are from Sunday to Friday with a trading halt from 4:00 am to 5:00 am EST (New York Time) on each weekday.

Other exchanges’ trading hours will depend on specific contracts, so check with your broker or trading platform.

Bottom Line On Trading Natural Gas

Trading natural gas provides UK investors with a dynamic way to generate profit, as well as the option to use arbitrage and hedging strategies. It also is a strong option for those looking to diversify their portfolio. However, the volatile nature of this commodity can make it risky to trade, so it should be approached with caution by those new to online trading.

To get started, head to our table of the top natural gas brokers for UK traders.

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