For some investors natural gas remains an exciting frontier. Read on for an in-depth look at why natural gas investing can be compelling.
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.
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) in order to reduce transport risk and allow for easier storage.
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.
Ways to invest in natural gas: 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 seemed to prove the latter camp correct — natural gas prices remained at historic lows, with the coronavirus pandemic wreaking havoc on energy commodities across the board.
However, 2021 has gone to the bulls and 2022 looks set for higher natural gas prices as well. In its Q4 2021 Gas Market Report, the International Energy Association (IEA) notes that the winter of 2021/2022 opened on October 1 with record-high gas prices for the season. Its researchers attribute the increase in prices to a "strong recovery in demand, extreme weather events and unplanned supply outages," all of which have led to tighter markets.
Record-high spot gas prices have had the most impact in Europe and Asia amid lower-than-average storage inventory levels. The IEA sees global gas demand finishing 2021 up by around 3.2 percent year-over-year.
"This recovery in gas demand has been driven mainly by fast-growing markets — primarily in Asia and, to a lesser extent, the Middle East — and subject to uncertainties regarding industrial rebound or fuel price competitiveness," the organization states in its report on the industry.
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. This group 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 Joe Biden's pledge to make cutting methane emissions a central part of his agenda, as evidenced by the Environmental Protection Agency's recently proposed regulations on the nation's many oil and gas wells, including plugging methane gas leaks at gas and oil wells in the US.
It's also important for market participants to keep an eye on issues related to hydraulic fracturing. The process, commonly known as fracking, is used to extract shale gas deposits from the ground. It has come under fire in recent years for its environmental impact.
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.
Ways to invest in natural gas: ETFs, futures and stocks
Those who decide to invest in natural gas 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 ETF Database, there are five natural gas ETFs, including 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're interested in other stocks, check out our list of the top oil and gas stocks on the TSX and TSXV here.
This is an updated version of an article first published by the Investing News Network in 2020.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.