Investment opportunity in natural gas 2024: When to enter the market?

The natural gas market has undergone a radical transformation over the past eighteen months. After reaching all-time highs in August 2022 driven by European geopolitics, prices plummeted by 72.6%, closing 2023 at $2.726 per unit. This dramatic turn opens a window of opportunity that few analysts expected just a year ago. For those seeking to invest strategically in natural gas, the current context presents both bullish signals and latent risks that require in-depth analysis.

The Paradigm Shift: Why Natural Gas Became Critical

For decades, natural gas was considered simply another fuel in the global energy basket. Its sudden importance arose from a perfect cocktail of geopolitical tensions, supply restrictions, and accelerated energy transition. Today, it accounts for approximately one-fifth of the entire global energy supply, a 44.1% increase since 1973, when it only made up 16.1%.

What makes this hydrocarbon so indispensable? Compared to coal, it emits significantly fewer greenhouse gases; it is more economically accessible than oil; and it has greater extraction and transportation ease. For developed economies, especially European ones, it became a strategic alternative after disruptions in Russian supply.

2023 Outlook: How the Market Was Rewritten

The price drop was not accidental. Three factors converged simultaneously during 2023. First, favorable weather conditions reduced heating demand in the Northern Hemisphere. Second, Europe accelerated its energy independence through investments in imported liquefied natural gas (LNG) from the United States and the Middle East. Third, Asian demand contracted due to weakness in China, Japan, and South Korea.

The International Energy Agency reported that European demand collapsed 10% in just the first half, equivalent to 30 billion cubic meters (bcm). Residential and commercial sectors drastically reduced consumption, while gas-based electricity generation collapsed amid the expansion of renewables.

2024 Outlook: Inflection Point on the Horizon

For the coming year, markets anticipate a turning point. Projections suggest global consumption will rise to 4,120 bcm, a 1.9% increase over 2023. However, geographic distribution will be critical: Asia Pacific will lead with a 4.3% increase (39 bcm), while the Middle East would grow 2.5% and Eurasia 2.1%.

Regarding supply, an increase of 81 bcm is expected, reaching 4,137 bcm. Eurasia, dominated by Russia, will contribute an additional 27 bcm despite reduced European shipments. The United States will maintain its position as a world-class LNG producer, while the Middle East and Africa emerge as crucial alternative suppliers.

Price projections are particularly relevant for those considering investing in natural gas this year. European prices (TTF) are expected to rise 25%, averaging $17 per million British thermal units (USD/MBtu). In Asia, spot LNG would increase by 20%, just below $17 USD/MBtu. In the US, the Henry Hub benchmark could rise 30% to $3.5 USD/MBtu due to tighter fundamental dynamics.

Investment Vehicles: How to Participate in the Rally

Those wishing to invest in natural gas have multiple options depending on their risk profile and time horizon.

Contracts for Difference (CFD)

CFDs allow speculation on price variations without owning the underlying asset. They offer direct exposure to spot market fluctuations with leverage, multiplying both gains and losses. This volatility makes them ideal for short-term traders with high risk tolerance.

To illustrate the mechanics: a standard natural gas contract equals 10,000 million British thermal units. If the average price is $7.114 per unit, the nominal value of the contract amounts to $71,140. With an initial margin requirement of 10%, a trader would need just $7,114 to control the full position, representing 10x leverage.

Each minimum move of $0.001 generates a profit or loss of $10 per contract. If a short position is opened at $7.114 and the price drops to $6.990, the profit would be $1,240 on an initial investment of $7,114, equivalent to a 17.4% return on the capital employed.

Energy Producer Stocks

A less volatile alternative involves investing in shares of major hydrocarbon-producing corporations. Companies like Exxon Mobil (quote: 100.92 USD) and Chevron (149.50 USD) accumulated returns of 64.93% and 27.40% respectively since early 2022, while spot natural gas declined 27.50% in the same period.

Although these stocks have suffered significant corrections from their highs, they maintain clear upward trends in the medium term and are currently in lower ranges of consolidation. Their lower relative volatility makes them a more suitable option for conservative investors.

Risk Management: Position Sizing

For CFD traders, disciplined management is essential. Starting with a capital of $7,114, position size should be calculated based on the required margin. Maintenance margin typically reaches 5% of the contract value. If the account falls below this threshold, the broker will issue a margin call, forcing additional deposits.

The general recommendation for non-professional traders is not to risk more than 3 to 5% of total capital per individual trade. This discipline preserves the ability to continue trading even after losing streaks.

The minimum risk-reward ratio should be 1.5:1, considering that overnight financing costs and market spreads reduce net profitability in short-term operations.

Advantages and Challenges of Natural Gas as an Asset

Favorable Factors: Commodity markets have exceptional liquidity, allowing quick entries and exits. Diversification outside traditional stocks and bonds provides hedges against inflation. Leverage amplifies gains in clear directional scenarios. There is no obligation for physical delivery, simplifying operations.

Latent Risks: Extreme volatility can quickly wipe out capital. Demand is pro-cyclical, contracting during recessions. Unpredictable weather factors, geopolitical tensions, and supply disruptions can cause price jumps disconnected from fundamentals. Leveraged positions proportionally amplify losses.

Final Outlook for 2024

Natural gas enters 2024 in a peculiar position: depressed prices after the collapse of 2023, but with more balanced supply-demand fundamentals. Projections point toward a moderate price recovery, although high volatility will persist.

Those looking to invest in natural gas should abandon the illusion of market prediction. Instead, an approach based on observing price signals, disciplined position management, and a favorable risk-reward ratio proves more effective. Opportunities exist both in long positions during bullish phases and in short sales during corrections, but always within a framework of controlled risk and capital preservation.