When you hear on the news that natural gas prices are rising and falling, where and who determines the price? Years ago the natural gas market was tightly regulated with prices set by the government. In order to increase production, those regulations were loosened allowing the price to fluctuate with market conditions.

Natural gas futures have a direct influence on natural gas prices. The benefit to this is that there is transparency in the price of natural gas. Anyone can turn on CNBC, pick up the Wall Street Journal or look for the price online. No longer are natural gas prices shrouded in secrecy.

So what can we do with this information? You can invest in natural gas in several ways. One way is to trade the natural gas futures on the New York Mercantile Exchange. This is the largest natural gas futures contract in the world. This contract is called the Henry Hub natural gas contract since it is based on delivery of gas to the Henry Hub gas processing plant located in Louisiana. This futures market was opened in 1990, and natural gas futures options were introduced in 1992 as a further way of hedging natural gas prices.

Natural gas contracts are traded 2 ways. First is the open outcry way. This is where your order is directed to the trading floor and executed in the natural gas pit. These are the people you have seen in movies like Trading Places and on TV jumping and screaming at each other to make a trade.

You can also choose to execute your trades electronically. Here you will select a price on your computer at which to trade. Since open outcry and the electronic trade off of each other, the prices will be the same.

You would need to open a futures or commodity account with a broker. You can find many of them online. You will need see how much money you will need to open an account, what their margin requirements are and how much they will charge per trade. Not all futures brokers charge the same commission. You will need to check commission prices and the level of service they will offer you. Do you prefer to do your own research or do you want to be guided by the broker?

If you do decide to trade off a screen, you will then have to invest in a fast computer and a high-speed cable connection. You don’t want to be left in the dust by faster traders. You will also have to choose which trading platform and charting software you want to use too.

Another way to trade natural gas futures is to invest in a natural gas ETF(exchange traded fund). One of the most popular natural gas ETFs is the United States Natural Gas Fund (NYSE:UNG). This gas ETF purchases the front month futures contract on the NYMEX. When the front month is within 2 weeks of expiration, they will then “roll” the contract into the next month. This means they will sell their position in the front month and at the same time purchase the next month contract so you are always “long” the market.

What if you think the price of natural gas is going down? How can you profit from that? Once again you can trade a natural gas ETF that is based on the movement of the futures contract. The Horizons BetaPro Natural Gas Bear Plus ETF sells or gets “short”’ the front month natural gas futures. This ETF also “rolls” its contracts forward near expiration so you will always be short the natural gas market.

Now you know how natural gas prices are set and how you can profit from them.

Written By Natural Gas ETF Guide

ETFs offer an easy way to play Natural Gas and there are many options available besides the most popular US Natural Gas ETF (NYSE:UNG).  We have listed some other options for investors to look at and compare to one another below.  Note that we have listed some industry related ETFs as well as direct Natural Gas exposure plays excluding any leveraged ETFs.  You can also visit our U.S. Natural Gas ETF (NYSE:UNG) category for more insight.

United States Natural Gas Fund (NYSE:UNG)           

The United States Natural Gas Fund, LP (NYSE:UNG) is a new way for investors and hedgers to manage their exposure to energy. The United States Natural Gas Fund LP (NYSE: UNG) is an exchange traded security that is designed to track in percentage terms the movements of natural gas prices. UNG issues units that may be purchased and sold on the NYSE Arca. The investment objective of UNG is for the changes in percentage terms of the units’ net asset value to reflect the changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in the price of the futures contract on natural gas traded on the New York Mercantile Exchange that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire, less UNG’s expenses. 

United States 12 Month Natural Gas (NYSE:UNL)           

The investment seeks to reflect the changes, net of expenses, of the spot price of natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in the average of the prices of 12 futures contracts on natural gas traded on the NYMEX. The fund will consist of the near month contact to expire and the contracts for the following eleven months, for a total of 12 consecutive months contracts, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire and the contracts for the following eleven consecutive months.           

iPath DJ-UBS Natural Gas TR Sub-Idx ETN (NYSE:GAZ)           

The investment seeks results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones-UBS Natural Gas Total Return Sub-Index. The note is designed to reflect the performance of natural gas. The index is composed of the Henry Hub Natural Gas futures contract traded on the New York Mercantile Exchange.           

First Trust ISE-Revere Natural Gas Idx (NYSE:FCG)           

The investment seeks to replicate, net of expenses, the ISE-REVERE Natural Gas index. The fund invests at least 90% of assets in common stocks that comprise the index. The index is an equal-weighted index that consists of exchange-listed companies that derive a substantial portion of their revenue from the exploration and production of natural gas. The fund is nondiversified.           

iShares Dow Jones US Oil Equipment Index (NYSE:IEZ)           

The investment seeks results that correspond generally to the price and yield performance of the Dow Jones U.S. Select Oil Equipment & Services index. The fund generally invests at least 90% of assets in securities of the Underlying index and depositary receipts representing securities of the Underlying index. It may invest the remainder of assets in securities not included in the Underlying index but which BGFA believes will help the fund track Underlying index, and in futures contracts, options on futures contracts, options and swaps as well as cash and cash equivalents, including shares of money market funds advised by BGFA. It is nondiversified.           

Jefferies | TR/J CRB Wildcatters Exploration & Production Equity ETF (NYSE:WCAT)           

The investment seeks investment results that replicate as closely as possible, before fees and expenses, the price and yield performance of the Thomson Reuters/Jefferies CRB Wildcatters Energy E&P Equity index. The fund normally invests at least 80% of total assets in the equity securities that comprise the underlying index and depositary receipts based on the securities in index. The index is designed to track the overall performance of a universe of listed U.S. and Canadian small and mid-capitalization companies engaged in the exploration and production of oil and natural gas. The fund is nondiversified.

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