Of course we know how natural gas is used - it generates electricity, heats homes, and fuels an increasing number of vehicles.
And each month, most of us get a gas bill from our local utility. It's an easy-to-understand arrangement: We pay the bill, they book the profits.
But when you understand how natural gas is traded, you can claim an edge for yourself. In effect, you can get collect your "cut" of the gas bill every month.
And, with the United States already taking a commanding lead in natural gas production, there's never been a better time to trade gas futures.
It's surprisingly easy...
A natural gas future is a contract obligating the buyer to purchase a specific quantity of natural gas at a future date and price. Delivery dates are set around the 15th day of the following month. Futures are priced per million British thermal units (BTUs) - one BTU is the amount of energy needed to change one pound of water by one degree Fahrenheit.
Like all contracts, there are important specifications to make clear what everyone is getting. A natural gas futures contract has 10 specifications:
Ticker Symbol: NG on the New York Mercantile Exchange (NYMEX), ENG on the electronic Chicago Board of Trade (eCBOT)
Contract Size: 10,000 million BTUs (British/Commonwealth-style number notation prevails)
Deliverable Grades: Determined by pipeline specifications in effect at the time of delivery
Contract Months: All months of the year
Trading Hours: 9 a.m. to 2:30 p.m. EST on the NYMEX, 6 p.m. to 5:15 p.m. CST on the eCBOT
Last Trading Day: Trading ends three business days before the first calendar day of the delivery month
Last Delivery Day: Last business day of the contract month
Price Quote: Measured in cents per million BTUs
Tick Size: A "tick" is the minimum upward or downward movement a stock or future can move. For natural gas futures, it is $0.01 per million BTUs.
Daily Price Limit (not applicable in electronic markets): $3 per million BTUs; contracts may expand by $3 in either direction if they are traded, bid, or offered. If any contract is traded, bid, or offered at the $3 limit for five minutes, trading is halted for five minutes.
Here's How the Futures Are Traded
A futures contract for natural gas can be traded on the NYMEX, Intercontinental Exchange (ICE), or Multi Commodity Exchange (MCX). The NYMEX is the commodity benchmark in the United States while the ICE and MCX are based out of the U.K. and India, respectively.
Like all other commodities, natural gas has its own ticker and contract value. These components help you figure out the best opportunities to trade and sell it.
If you're buying or selling a natural gas futures contract, you'll see a ticker handle like this: NGK15 @ 2.76.
Here's the list of letter, or delivery, codes used in ticker quotes to specify the delivery month:
"NG" denotes the commodity being traded is natural gas. "K" represents May - the month in which the natural gas must be delivered - and "15" represents the year. The "2.76" denotes the price per million BTUs being bought or sold at that time.
So, in plain English, the whole string put together means: "I am buying/selling natural gas for May 2015 delivery at a price of $2.76 per one million British thermal units."
Now we have to calculate the contract value, which determines how much your amount of natural gas is worth in the overall market...
The value of a futures contract can be calculated by multiplying the market's current price by the contract's size. Because a futures contract's size is 10,000 million (10 billion) BTUs, you simply multiply the current price by 10,000.
If we stick to the above ticker's price of $2.76, we've determined that the contract's value in the natural gas market is $27,600.
Now let's look at how well those contracts are likely to perform for you...
While the energy sector has struggled this year, natural gas has been much less volatile.
Gas futures have fallen about 5.4% in 2015. Meanwhile, benchmark West Texas Intermediate (WTI) oil and Brent oil have dropped 12.8% and 7.3%, respectively (as of March 24).
Oil futures are more volatile because they're tied to the world's No.1 energy commodity. They're exposed to complex geopolitical factors that can depress prices at any given moment.
One example is OPEC's November 2014 decision to maintain production. The news sent oil prices crashing below $70 per barrel that day - a level not seen in over four years.
Natural gas prices, on the other hand, are much more stable. Trading is more localized since natural gas is harder to transport overseas.
Natural gas futures generally perform well during the harsh winter months. Prices rose above $3 in January and February when subzero temperatures blanketed most of the Eastern United States.
Natural gas prices will rise throughout the year as the industry undergoes three "super shifts."
Money Morning Global Energy Strategist Dr. Kent Moors says one of them is the transition from coal usage to natural gas usage in the U.S. power companies that use coal are under pressure to switch to natural gas because of the government's dedication to reducing carbon emissions. These emissions contribute to climate change and pose health hazards.
About one-third of the United States' coal-generating capacity from 2012 will be retired by 2020. Most of that will be replaced with natural gas.
"This transition has been going on for some time now," Moors explained. "And while there is a balance forming in several specific regions in the country where coal (even lower grade coal) has reached usage equilibrium with gas, the larger move to gas continues to gain momentum."
The second catalyst is the increased use of natural gas over oil in the production of petrochemicals. This will boost natural gas demand because petrochemicals are used to make a range of common products. These include plastics, rubbers, detergents, dyes, and fertilizer.
The final change is the looming shift to exporting liquefied natural gas (LNG). LNG will revolutionize the natural gas sector by turning it into a globally traded and globally priced commodity.
With its booming shale gas production, the U.S. plans to meet global LNG demand, which has doubled since 2000. The Department of Energy has approved five LNG export projects since 2012. The first one to pass was Cheniere Energy Inc.'s (NYSE MKT: LNG), which is expected to begin this year.
According to Moors, U.S. LNG exports will account for 6% to 8% of the global LNG market within five years.
