The current world order revolves around energy for economic growth and is experiencing immense turmoil due to the extreme price dynamics of the energy market. Adding fuel to the fire is the current status of conventional fossil fuels which act as the backbone of today’s thriving economy but are facing massive criticism from several organizations and individuals advocating for a greener future.

Natural gas: a perfect candidate for transition fuel

Amidst this growing concern about climate change and an inclination towards sustainable development, natural gas is emerging as a transition fuel. This is because natural gas is a relatively clean-burning fossil fuel, emitting fewer greenhouse gases and air pollutants compared to coal, oil, and others.

These advantages of natural gas over other conventional fossil fuels make it the perfect candidate for power generation, as it can help to reduce carbon emissions and improve air quality.

In addition to being a clean-burning fossil fuel, it is also a versatile energy source that can be used in a variety of ways. It can be used to generate electricity in power plants, works as a fuel for transportation, and is a feedstock for the production of chemicals and other industrial products.

Natural gas contract: amongst the most volatile and liquid contracts in the Indian market

All these advantages along with being an abundant and relatively inexpensive fuel source make it one of the most traded commodities of Indian commodity markets.

The commodity saw huge interest for the commodity trading community during the year as the commodity saw extreme volatility due to the Russia-Ukraine war.

Factors need to be considered by Natural gas traders

As mentioned above due to the highly volatile nature of natural gas, market participants need to keep certain factors in their mind before diving into this highly risky instrument. A few of the major factors that need to be considered and their influence on the price movement should be kept in mind before initiating any trade in the natural gas market.

These factors and their responses are mentioned below:

  1. Demand: Since natural gas acts as a raw material for growth, the demand for natural gas grows with the growth of the global economy. If demand for natural gas increases, prices will likely rise.
  2. Dependence on the weather: The use ofnatural gas for heating and electricity generation purposes is responsible for its dependence on the weather. Cold weather can drive up demand for natural gas as it is used for heating. On the other hand, hot weather can drive up demand for natural gas as it is used for electricity generation.
  3. Production: If disruptions occur in natural gas production like the one that happened during the Russia-Ukraine war, the prices may rise exponentially as the supply is reduced.
  4. Inventory levels: Low inventory levels of natural gas can push prices higher as it indicates a tight supply scenario.

All these price dynamics attract traders’ interest making natural gas one of the most popular contracts in the Indian commodity market. Market participants can invest in natural gas via future and option contracts and use the volatility of the commodity market where natural gas enjoys the position of one of the most traded commodities. 

Word of caution: It’s important to note that the natural gas market is subject to significant volatility and price fluctuation and hence a strong risk management approach should be a part of the trading strategy.