Investors considering commodities for diversification or other investment purposes should not ignore natural gas.
Natural gas is not a commodity anyone can ignore for any reason. In the US, it is the most widely used fossil fuel for the heating of homes, according to the Energy Information Administration. In other countries, its use for this purpose is even more prevalent.
In addition to heating homes, natural gas has begun replacing coal as the fuel most widely used to generate electric power.
Natural gas is a safe and clean energy source and a raw material used to manufacture fertilizer and other essential industrial goods.
What Drives Natural Gas Prices?
The price of natural gas, like that of any other commodity, is subject to the supply-demand dynamic. At times of greater demand than supply, it goes up. Booming economies and economic recoveries tend to create such circumstances.
When economies tank, demand dries up, and the price of natural gas plummets. A perfect example in this sense is the COVID-19 lockdown that erased quite a bit of global demand for natural gas.
The largest producer of natural gas is the US. Russia is a major natural gas producer as well. Geopolitical tensions and considerations can have a significant impact on the price of natural gas.
How Can You Invest in Natural Gas?
Natural gas requires special storage. It is, therefore, impractical for investors to take physical possession of the commodity.
The only practical investment paths are stocks, ETFs, and futures.
Futures are the preferred investment vehicles of knowledgeable and wealthy traders. Futures are riskier than natural gas stocks and require a better understanding of the market fundamentals driving the price.
Stocks are safer than futures and ETFs. They track the price of the underlying asset closer than some ETFs, as the exposure of the natural gas industry to the asset price is direct.
Natural gas stocks belong to companies involved in the natural gas industry, from drilling and production to distribution.
ETFs are baskets of natural gas securities, offering diversified exposure to the industry. Natural gas ETFs tend to track the price of the underlying asset more loosely than stocks and futures. Due to their diversity, ETFs are great for portfolio diversification within the natural gas industry.
As commodities go, natural gas investments are relatively high-risk, high-reward ventures. The risks are many, but the potential upside can be generous as well.
Given that natural gas is clean and safe compared to other energy sources, the future of natural gas investing is bright. Demand for this commodity has not peaked yet. And based on current trends, it is unlikely to peak in the foreseeable future. Not even the introduction of renewable energy sources can put a significant dent in the natural gas market for now.