For some investors natural gas remains an exciting frontier. Read on for an in-depth look at why natural gas investing can be compelling.
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); that’s because this cooler liquid gas reduces transport risk and allows for easier storage.
The US Energy Information Administration says natural gas is the most widely used fuel for space heating in the US, and 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.
For some investors, natural gas investment remains an exciting frontier and a 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 in this sector.
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.
2020 has shown that the latter camp was correct — natural gas prices remain at historic lows, with the coronavirus pandemic wreaking havoc on energy commodities across the board.
Growth could be on the horizon, however, as suggested in the Global Gas Report 2020, published by the International Gas Union, BloombergNEF and Snam, an international gas infrastructure company.
The report forecasts medium-term growth stemming from “increasing cost-competitiveness and increased global access to gas.” LNG imports totaled 482 billion cubic meters in 2019, up 13 percent from 2018. In 2020, this figure is expected to drop by around 4.2 percent, but the report’s authors suggest it could quickly rebound in 2021 if the COVID-19 crisis can be contained.
In terms of demand, by 2025, India is expected to nearly double the length of its gas transmission grid, and China is projected to increase its natural gas pipeline network by about 60 percent.
As one of the largest and best-known oil- and gas-producing regions, the Middle East is crucial to watch and plays a significant role in the Organization of the Petroleum Producing Countries, better known as OPEC, which helps dictate the cost of oil and gas in the energy sector.
Of course, any number of factors could cause the natural gas sector’s 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, as evidenced by the tariffs and levies he has instituted.
It’s also important for market participants to keep an eye on issues related to hydraulic fracturing. The process, also known as fracking, is used to extract shale gas deposits from the ground, and has come under fire in recent years for its environmental impact.
All of that uncertainty may be daunting, but an investor 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 as a commodity have plenty of ways to gain exposure to the fuel. Exchange-traded funds (ETFs) are one possibility, as is buying a futures contract or investing in natural gas stocks on an exchange.
According to CommodityHQ, the most popular natural gas ETFs include the United States Natural Gas Fund (ARCA:UNG) and the ProShares Ultra Bloomberg Natural Gas ETF (ARCA:BOIL). It is worth noting that some ETF investments 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, some large companies that are heavily involved in natural gas include Suncor Energy (NYSE:SU,TSX:SU) and Devon Energy (NYSE:DVN). 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.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.