Natural Gas Trading: Contracts, Way to Trade & How to Start

Key takeaways

MCX Natural Gas is cash-settled and shadows the US Henry Hub price on NYMEX, which means the real driver is American supply and demand, not what's happening with gas in India.
There's a standard lot (1,250 mmBtu, ₹125 a tick) and a mini lot (250 mmBtu, ₹25 a tick), and most beginners are better off starting with the mini.
Thin storage buffers and overnight US-hours gaps make natural gas one of MCX's most volatile contracts, so stop-losses are essential.
Prices are driven mainly by weather, EIA storage data, US production/LNG exports, geopolitical events, and the rupee-dollar rate.

There are always commodities where markets react much faster than any news headline that can justify its move, and among them, there is natural gas. Any cold spell in Europe, a pipeline breakage in Texas, or some other event leading to a significant change in volumes of LNG exports may easily move prices significantly over just a few hours.

It goes without saying that traders in India can relate to this volatility personally since natural gas futures are traded actively on the Multi Commodity Exchange (MCX) and the contract has gained a reputation for being one of the most volatile contracts on the platform. This article explains what a contract is, how it works, and what a beginner should know before placing their first order.

What is Natural Gas Trading?

Natural gas trading means not buying and selling physical natural gas but natural gas futures contracts on MCX in particular. The main point of these contracts is that traders are able to make some predictions about the future direction of natural gas prices without any need for delivery of the gas.

The futures contract is an agreement between a buyer and a seller to buy or sell a specified volume of natural gas at a specified price and on a specified expiration date. The gain/loss of the trader will depend on the actual change in price compared with the entry price.

Why is Natural Gas one of the most popular commodities

As it has been mentioned above, natural gas is used in heating homes, generating electricity, and in industrial processes. Demand for it is very seasonal as it increases significantly in the winter period in the northern hemisphere and declines in warmer periods.

In contrast to crude oil, natural gas storage is more challenging, thereby restricting the amount in storage. As a result, even minor disturbances in its supply, like the breakage of some pipeline or a reduction in production volumes, are reflected in the prices immediately.

From the perspective of traders, it means frequent sharp movements in prices, which is exactly what attracts the attention of many short-term traders.

How to trade in Natural Gas on the MCX

Natural gas futures on MCX are cash-settled contracts, meaning that there is no delivery of physical gas at the expiration of the contract. The profits/losses will be credited/debited on traders' accounts in rupees.

Prices on MCX follow Henry Hub, the main US natural gas price traded on the NYMEX exchange. If the Henry Hub price changes overnight, natural gas on MCX opens the next trading day with this change, taking into account the rupee-dollar exchange rate.

Gains and losses on MCX positions are marked to market each trading day, meaning they are settled daily until the trader closes the position or the contract expires.

Natural Gas Futures Contract specifications

MCX provides two contract sizes, which are suitable for various types of traders.

Standard contract: Lot size is 1,250 mmBtu (metric million British thermal units), tick size is ₹0.10. Tick movement equals ₹125 per lot.
Mini contract: Lot size is 250 mmBtu, tick size is ₹0.10. In this case, tick movement equals ₹25 per lot, making this contract more suitable for retail traders with limited capital.

To know more about lot sizes check Commodities Lot Size

Typically, contracts expire towards the end of every month, following the NYMEX Henry Hub expiration cycle, and settlement is done in cash form. MCX also provides options on the futures contract with strike prices placed at intervals of ₹5 and premiums settled on the day after the trade.

Ways to trade Natural Gas in India

Retail traders in India have access to natural gas trading via MCX futures and options via a broker registered on this exchange. A separate commodity trading account is needed to place orders.

There are trading platforms, which provide live prices of MCX natural gas contracts along with the ability to see charts and place orders on the same screen, as it is used for equities.

It is possible to obtain indirect exposure to natural gas through stocks associated with natural gas (city gas distribution and exploration companies listed on NSE in particular), though the behaviour of their prices differs from the prices of futures contracts.

Price moving factors for Natural Gas Contracts

Here are some factors to consider:

Weather: Harsh winters in the US and Europe tend to boost heating demand, while mild winter conditions could lead to a sudden decline in prices.
Storage reports: The weekly report on US natural gas storage provided by the Energy Information Administration gets much attention regarding the supply/demand balance.
Production/export: Variations in the output of US shale gas and export volumes of LNG to Asian and European consumers affect the supply/demand ratio directly.
Political events: disruptions of pipelines, geopolitical tensions around major producers, and imposition of sanctions might lead to sudden spikes in prices.
Currency movements: Due to the nature of the pricing mechanism, the depreciation of the rupee may result in an increase in MCX natural gas prices without any variation in the Henry Hub benchmark price.

Risks to consider before Trading Natural Gas

One of the riskiest products available on MCX is the natural gas contract, as its price can experience sharp fluctuations, which make it equally profitable and risky to trade. Rapid movements can give you the possibility to earn from the market, but also can completely erase your position if it is too small.

In the case of trading futures on margin, it becomes possible to lose more than the initial margin if the position experiences losses. Hence, risk management becomes a necessity rather than an option.

Gaps should be considered as well, as there is a time difference between the Henry Hub trading session (when the futures trade) and the MCX session. Therefore, gaps in price could appear, and a stop loss may not work properly when the gap appears.

How to start Trading Natural Gas

Here are the steps for trading natural gas if you have never had experience trading commodity futures before.

Create an additional commodity trading account with a broker registered at MCX in addition to your trading account.
Activate the commodity segment, which would require the updating of KYC and income details.
Fund your account and check the margin required for the natural gas lot.
If you are new to commodity trading, it is recommended to start with the mini contract as it requires a smaller margin and limits losses per tick.
Watch for triggers such as weather forecasts and storage data before taking the position.
Place the order with the stop loss set, as the contract may move rapidly.
Monitor your position through the entire trading session since margin requirements can change during the day depending on volatility.

Conclusion

Natural gas trading on MCX allows traders to gain access to the globally known energy benchmark in one single trading account. It is the combination of the link between the contract and the Henry Hub price benchmark, along with relatively low storage buffers, that makes the contract move that rapidly.

Knowing the contract specifications, price drivers, and risks involved in leveraged trading is the difference between the natural gas contract being an opportunity or just gambling. Start small, use the mini contract, and trade with a stop loss are the basic things every beginner has to understand before making anything else.

FAQs

Is natural gas trading only for experienced traders?

No, but it is recommended to start with the mini contract and small position sizes due to the volatility of the contract.

Does natural gas futures trading involve actual delivery of gas?

No, MCX natural gas futures are cash-settled; positions are settled in rupees rather than physical gas.

Why does MCX natural gas move even when Indian gas demand hasn't changed?

As MCX prices are derived from the US Henry Hub benchmark and global supply/demand, and not local Indian consumption, this is the primary driver of prices.