Natural Gas Futures Trading Practical Guide: From Basic Understanding to Investment Strategy

Why Natural Gas Has Become a New Investment Hotspot

The massive investment in the 2022 Qatar World Cup (exceeding $220 billion) reflects the country’s enormous wealth derived from natural gas resources. How can a country with a population of less than 3 million become a global energy hub? The answer lies in the strategic value of natural gas as a “clean energy.”

As global environmental regulations become increasingly strict, the importance of natural gas as a transitional energy source is increasingly highlighted. Compared to coal, waste from natural gas combustion is easier to recycle; compared to wind and solar, it offers better stability. According to the International Energy Agency’s forecast, global demand for natural gas will grow by 31% by 2040, outpacing the 21% growth rate of oil. This long-term growth outlook has attracted more and more investors’ attention.

Development Context and Market Status of Natural Gas

Initially, natural gas was a byproduct of oil extraction, and humanity was unaware of its uses. It wasn’t until the 18th century that British scientists used natural gas to produce coal gas for lighting, revealing its commercial value. The rapid development of the American industrial era further promoted the improvement of natural gas infrastructure, making it no longer limited to local consumption.

A truly revolutionary shift occurred in 1956 with the maturation of liquefied natural gas (LNG) technology. Natural gas could now be stored and transported in liquid form, officially becoming an important part of the global energy system. This technological innovation opened the door to international trade.

In the past year, the natural gas market experienced intense volatility. The 2022 Russia-Ukraine conflict led to Russia halting gas supplies to Europe, triggering an energy crisis. LNG prices soared fourfold, and U.S. LNG ships headed to Europe earned single-trip profits of up to $100 million, attracting global capital into exploration. As supply increased and a warm winter arrived in 2023, prices quickly reverted to historical averages.

Although short-term prices are under pressure, this volatility highlights an important realization: LNG technology has proven that natural gas can be stored long-term, changing traditional views on its liquidity in the investment community. Meanwhile, major consumers such as shipping and power sectors are accelerating their shift to natural gas to achieve carbon reduction goals. According to DNV database statistics, over 420 ships worldwide now use LNG as fuel, and 529 new ships are expected to be launched with LNG in the next five years. These signs all suggest that demand for natural gas will continue to rise.

Analysis of Natural Gas Futures Market Structure

Three Major Trading Regions and Their Characteristics

Due to its large volume and high transportation costs, natural gas prices vary much more across regions than crude oil. The main global markets include:

North America: Centered around the Henry Hub in Louisiana, leveraging local oil and gas production, port advantages, and a comprehensive interstate pipeline network, it is the most liquid natural gas futures market globally. The NYMEX Henry Hub natural gas futures thus serve as the global pricing benchmark.

Europe: Includes the UK National Balancing Point (NBP) and the Netherlands Title Transfer Facility (TTF). However, trading is dispersed across various exchanges, limiting liquidity in individual markets.

East Asia: Uses the Platts JKM as the LNG price benchmark. Due to limited cross-border pipeline transportation, it mainly relies on LNG imports, with a relatively smaller market scale.

NYMEX Henry Hub natural gas futures trade volume far exceeds other markets, and prices are relatively cheaper. This huge regional price difference drives global investors to participate.

Main Futures Contract Specifications Comparison

The NYSE offers two main trading specifications:

Futures are settled via physical delivery, suitable for short-term speculation or risk hedging, not for long-term holding.

Analysis of Natural Gas Futures Trends and Trading Suggestions

Since November last year, natural gas futures have been on a downward trend, breaking below October lows. The next key support level is at $2.5/mmBtu (formed by July and August lows). Holding this level would keep prices stable; losing it could lead to a retest of the early-year low of $2.1.

The main reason for current price pressure is global oversupply. However, policy variables exist. As the US presidential election approaches, the current administration’s strict environmental policies may tighten domestic oil extraction, thereby limiting associated natural gas production (about one-third of US natural gas comes from oil drilling). This provides a medium-term trading signal.

Short-term strategy: When prices fall back to around $2.5, consider buying on dips, expecting future supply structure adjustments to bring price recovery.

Natural Gas Spread Contract Trading Plan

For investors with limited capital or insufficient understanding of trading rules, spread contracts (CFD) offer a more flexible alternative:

Compared to futures, CFD spread contracts have a very low entry barrier, with a minimum investment of only $270 to buy 0.1 lot. Traders can flexibly set entry prices (e.g., wait for price to fall to $2.5), adjust leverage (recommended 10x, requiring $250 margin), and set stop-loss and take-profit levels. After entering, no need to monitor prices constantly, very convenient for working individuals.

Long-term Investment Value of Natural Gas Concept Stocks

If you are unwilling to bear short-term volatility risks, stocks in the natural gas industry chain offer long-term growth opportunities. Global dependence on natural gas continues to increase, and the profitability of key companies is far more stable than futures speculation.

Leading LNG Export Company: Cheniere Energy(LNG)

Headquartered in Houston, it is the leading U.S. liquefied natural gas producer and exporter. The company initially focused on importing overseas LNG, but the shale revolution in 2008 changed the landscape. Cheap U.S. natural gas made imports unfeasible, prompting the company to pivot to exports, becoming the first to obtain U.S. government LNG export approval.

Its core advantages include: access to the largest customer base, complete storage and transportation facilities, and long-term sales contracts ensuring revenue certainty. Due to the significant price difference between U.S. and global natural gas, the company’s profits have a natural moat. It is expected to generate over $10 billion in cash flow in 2024, which can be used for dividends, share buybacks, or debt repayment. As long as regional price differences persist, LNG profits will continue to grow steadily, making it a long-term holding target.

Midstream Operator: Hess Midstream LP(HESM)

Also headquartered in Houston, HESM spun off from oil giant Hess(HES) and went public in 2017. Its main business is gathering, processing, and compressing natural gas, holding numerous outsourcing contracts from its parent company.

The investment appeal lies in two aspects. First, its cash flow is ample and healthy, providing risk buffers in a high-interest-rate environment. Second, its strong dividend-paying ability—paying $2.4 in dividends over the past year with a yield of 7.5%. In an uncertain economic outlook, HESM offers both spread opportunities and stable dividends, combining growth and defensive qualities, making it a safe haven in an investment portfolio.

Integrated Energy Company: ConocoPhillips(COP)

ConocoPhillips’ revenue structure: 51% crude oil, 36% natural gas, 3% natural gasoline(NGL). Its unique advantage is that its main exploration assets are located in the U.S., with 94.46% of its natural gas production coming from the U.S., far higher than competitors (Chevron 52.2%, ExxonMobil 32.78%).

This means ConocoPhillips fully benefits from the price differential between low-cost U.S. natural gas and high-cost global natural gas. As global demand for natural gas increases and regional price spreads widen, the company’s revenue will also grow, making it a long-term focus.

Natural Gas Investment Decision Framework

Natural gas is neither like gold with long-term preservation characteristics nor purely speculative. Its features lie between crude oil and stocks:

Short-term trading plan: Natural gas futures and CFD spread contracts are suitable for traders seeking arbitrage gains. Compared to futures, CFDs require less capital, allow larger leverage, and have no expiry pressure, making them more suitable for short-term trading. However, it requires sufficient time to monitor price movements.

Medium- to long-term allocation plan: Natural gas concept stocks avoid short-term volatility, allowing investors to focus on long-term industry growth trends. As long as the U.S. and global natural gas price differentials exist and energy transition continues, these companies can generate stable returns for shareholders.

For ordinary working individuals wanting to participate in natural gas investment, it is recommended to prioritize concept stocks, using time to gain space, and let industry fundamentals drive profits.