Natural Gas Futures

One of the most important things to understand before investing in natural gas futures is that this is a market driven commodity. As a result, your decisions on when to buy and when to sell need to be made only after a careful assessment of market trends. Most often a knowledgeable broker can advise when the movement (upwards or downwards) is about to change so that you can buy or sell at the right moment. Since only a member of the futures exchange can actually trade on the futures market, you would need to buy futures through a broker who is affiliated with a member of an exchange.

The United States Natural Gas Market
Amazingly, natural gas accounts for approximately 23 to 25% of the energy consumed in the United States and of that amount, most of our supply is produced domestically. What we are unable to produce here, we import from Canada and liquefied natural gas imports from elsewhere around the globe. One of the problems which we are facing is that many of our natural gas fields are either mature or becoming mature which means that the cost of production will go up proportionately.

Market Driven – Supply, Demand and Cost of Production
Keep in mind that natural gas futures are market driven which means that sound investments are based on an analysis of supply and demand but also in the cost of production as well. A short supply and a high cost of production can drive natural gas prices up which in turn would most likely yield a significant profit for those on the short end (seller) of the transaction. Of course, that is taking into account that those futures were bought at a lower price.

How to Invest in Natural Gas Futures
As stated previously, futures can only be traded on the floor by members of the exchange. Members gather at exchange hubs, the largest in the United States is the Henry Hub in Louisiana, a delivery point for the NYMEX in NY, in order to buy and sell (trade). Whether you are an individual or a corporate investor, you would still need to contract the services of a futures broker who would make your transactions for you. Without going into complex mathematical calculations or overly complex explanations, it is sufficient to say that you will only be investing a percentage of the net value of the futures.

Investors, Brokers and NYMEX Members
Once you have discussed with your broker how much you have to invest, your broker can better advise you on your best options in natural gas futures. The broker will then make transactions on your behalf through his or her partners who are members of the NYMEX who have the right to stand on the floor and trade. But it should be understood that you are not buying stocks in natural gas, you are buying a futures contract that matures at some prespecified future point. In effect, your futures contract is betting on whether or not the price of natural gas will be up or down.

If you are new to natural gas futures, it would be a good idea to understand the concept of futures trading prior to making an investment. While there are a great number of savvy investors who understand the concept of futures, there is also a significant portion of the population who actually believe they are buying stocks in natural gas. A good futures broker will be able to explain the difference easily so that you can understand the concept, but one thing is most often true of investing in futures. The market is volatile and moves quickly. Therefore, any profits or losses realized when investing will be seen in a relatively short amount of time which could be as short a period as 30 days. If you want to consider investing in natural gas futures, your first step would be to contact a licensed futures broker.

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