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Natural gas is a hydrocarbon gas mixture primarily composed of methane. It should not to be confused with ethane, which is another type of odorless gas. It can be found by itself or in association with oil, and is one of the safest and most useful forms of clean energy.
Natural gas is often cooled to produce liquefied natural gas (LNG) because the cooler, liquid gas reduces transport risk and allows for easier storage.
The US Energy Information Administration (EIA) says natural gas is the most widely used fuel for space heating in the US; it has also started to beat out coal as the top fuel for power generation. Even so, demand for natural gas around the world can be volatile, as it is very much dependent on the weather.
However, for some investors, natural gas investment remains an exciting frontier and potentially lucrative portfolio addition. Read on for a more in-depth look at why natural gas investing can be compelling and for a brief overview of how to start investing.
Natural gas investing: Market outlook
As mentioned, volatility in natural gas demand often leads to big spikes and declines in natural gas prices. At the end of 2017, analysts thought a decrease in natural gas production could reduce inventories and drive up demand; other experts expected prices to remain low over the next few years.
Still others now see growth on the horizon, as noted in a Global Market Insights GCC natural gas report.
“The unconventional natural gas market is set to expand over 9 percent by 2024,” states the report. “Increasing focus toward monetization of regional non-conventional reserves to minimize dependency on imports will boost the industry growth.”
“For instance, Oman recently emerged as the first Gulf economy to join the unconventional oil & gas production boom,” it continues. “In 2017, the production began at the Khazzan tight gas field, which is the region’s first large-scale unconventional gas project, worth US$16 billion.”
As one of the largest oil- and gas-producing regions, the Middle East also plays a significant role in the Organization of the Petroleum Producing Countries (OPEC), which helps dictate the cost of oil and gas in the energy sector.
Issues over hydraulic fracturing, also known as fracking, a method used to extract shale gas deposits from the ground, have plagued the natural gas and LNG sector as the practice has come under fire for its environmental impact.
Of course, any number of factors could cause the natural gas sector outlook to change. A key part of the picture that investors will want to be aware of is US President Donald Trump’s pledge to make energy a central part of his agenda, evidenced by the tariffs and levies he has instituted.
All of that uncertainty may be daunting, but investors interested in the potential of natural gas investment should not necessarily be discouraged. After all, while prices for the fuel can reach incredible lows, they can also climb to incredible highs, which no doubt affects companies in the sector.
Natural gas investing: ETFs, futures and stocks
Investors who make the decision to invest in natural gas have plenty of ways to gain exposure to the fuel. Exchange-traded funds (ETFs) are one possibility, and buying futures and options contracts and investing in natural gas companies are others.
According to CommodityHQ, the most popular natural gas ETFs include the United States Natural Gas Fund (ARCA:UNG) and the First Trust ISE Revere Natural Gas ETF (ARCA:FCG). It is worth noting that some ETFs offer exposure to both the oil and gas markets simultaneously.
Investors considering investing in natural gas futures should be aware that these contracts are very liquid, and extremely active throughout the week. Trading in natural gas futures is generally heaviest on Thursdays, when the US Department of Energy releases its weekly natural gas storage report.
Some of the top natural gas futures contracts include NG Henry Hub Natural Gas Futures, QG E-mini Natural Gas Futures and Delivered Natural Gas Futures.
Lastly, investors can opt to invest in gas companies involved in the natural gas market. As with ETFs, many companies that are exploring for or producing natural gas are also focused on oil. It is difficult to find companies that are aimed purely at natural gas.
That said, CommodityHQ has identified some large companies that focus primarily on natural gas: Talos Energy (NYSE:TALO) and SandRidge Energy (NYSE:SD). If you are interested in other stocks, you can check out our list of the top oil and gas stocks on the TSX and TSXV here.