Natural Gas

4.2

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With agricultural commodities out of the way, the only major commodity that’s remaining is natural gas. In this chapter, we’ll not only be taking a good look at the natural gas commodity, but also will be getting into the specifics of natural gas trading. So, let’s not delay any further and jump right into the thick of things. 

Natural gas: An overview

You’ve already read about crude oil, its history, and how it is extracted from the earth in the previous chapters, right? Here’s something that will pique your interest in natural gas even more. The commodity is closely associated with crude oil. Yes, you read that right!

Natural gas reservoirs are usually found very close to oil wells and deposits. Sometimes, oil exploration and drilling companies do strike natural gas when undertaking oil well drilling. And since gas is lighter than crude oil, you don’t even have to drill deep to hit gas reservoirs. That said, certain natural gas pockets are also deeply buried underground, requiring the drilling companies to go quite deep into the earth’s crust to extract them.

Just like crude oil, natural gas is also a fossil fuel that’s created as a result of decomposition of plant and animal matter. However, unlike crude oil, natural gas is far cleaner and safer, making it a near perfect source of energy.

Natural gas: Its history

Let’s get into a bit of natural gas history. The commodity was first discovered by the Chinese around 500 BC. They found the gas seeping from the earth through cracks on its surface and immediately put it to use. However, it took quite a while (around 1785 to be exact) for the resource to be commercialized.

Even after commercialization of natural gas, people found it tough to transport the commodity from one place to the other. And as a result, the commodity was wasted for many years by venting it out into the atmosphere. That said, once scientists discovered an effective way to transport natural gas through pipelines, it was put to good use right away.

Right now, natural gas is currently supplied to the end consumer through pipelines, much like liquefied petroleum gas (LPG), and is used to heat up homes and power appliances such as water heaters and ovens.

Natural gas: Contract specifications

Okay, we’ll stop here with the natural gas overview and move on to taking a look at natural gas trading - more specifically, at the important futures contract specifications. Here’s a table that clearly shows you the specs that you need to know to get into a trade. 

Particulars

Contract specifications

Lot size 

1,250 mmBtu (million British thermal units)

Price quote

INR value per 1 mmBtu

Tick size

10 paise

Contract expiry date

Varies according to the contract launch calendar

Contract availability

3 contracts 

For instance, if you check the list of available contracts on the MCX website in the month of February 2021, you’re likely to find the following 3 contracts.

  • 23FEB2021
  • 26MAR2021 
  • 27APR2021

Maximum order size

60,000 mmBtu

Settlement

Cash settlement only 

 Now that you know what the natural gas futures contract entails, here’s a quick look at the price at which the contract is trading for in the MCX.

According to this snapshot from the MCX website, the natural gas futures contract is currently trading for around Rs. 227.10. The price mentioned in the snapshot above pertains to 1 mmBtu. Now by multiplying the price with the minimum lot size of a futures contract of natural gas (which is 1250 mmBtu), we get the total contract value, which comes up to around Rs. 2,83,875. The amount of margin that you would be required to deposit for purchasing 1 lot of futures comes up to just around Rs. 49,382, which is quite affordable for even a small retail trader.

That’s not all. For every rupee change in your favour, you get to make around Rs. 1,250 as profits. Considering the fact that you put in just around Rs. 50,000 as an investment to make this much profit, natural gas offers you a very handsome risk to reward ratio.

Wrapping up

With this chapter, we’ve finally come to the end of future contracts of commodities. In the next one, however, we’ll be dealing with the nitty gritties of commodity options. Till then, hold tight and keep reading Smart Money!

A quick recap

  • Natural gas was first discovered by the Chinese around 500 BC. 
  • However, it took quite a while (around 1785 to be exact) for the resource to be commercialized.
  • Even after commercialization of natural gas, people found it tough to transport the commodity from one place to the other. 
  • Now, natural gas is currently supplied to the end consumer through pipelines, much like liquefied petroleum gas (LPG), and is used to heat up homes and power appliances such as water heaters and ovens.  
  • There is only one derivative contract for natural gas, and it has a lot size of 1,250 mmBtu.
  • There are 3 natural gas contracts available to trade at any given time.
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