Oil and Gas

gas burner with flames coming out

Natural gas remains an exciting frontier for some investors. Read on for an in-depth look at why natural gas investing can be compelling.

Natural gas is the largest source of electricity generation in the US, recently beating out coal as the top power fuel. Even so, global demand can be volatile as it is very much dependent on the weather.

Natural gas is a hydrocarbon gas mixture that is primarily composed of methane and is found by itself or with oil. Although its a carbon-based fuel, natural gas is considered a cleaner form of energy than oil and coal. Natural gas is often cooled to produce liquefied natural gas (LNG) 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.

What is the outlook for natural gas?

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 COVID-19 pandemic wreaking havoc on energy commodities across the board.

However, 2021 set the bull market running, and 2022 has only brought higher and higher prices for natural gas. "Russia’s invasion of Ukraine has exacerbated the tightening supply of natural gas underway since mid-2021, further pushing up prices for consumers and leading to fuel switching and demand destruction," notes the International Energy Association (IEA) in a recent quarterly gas market report.

"It also casts longer-term uncertainty on market prospects for natural gas, especially in developing markets where it was to play a central role in energy transitions," the IEA continues.

Record-high spot gas prices have had the most impact in Europe and Asia amid lower-than-average storage inventory levels. However, the IEA sees global gas demand falling back as 2022 comes to a close and "remain(ing) subdued through 2025." The Asia-Pacific region is expected to account for 50 percent of the expected growth in global gas demand, mainly from the industrial sector, over the next few years.

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 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.

What are the ways to invest in natural gas?

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.

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