How are Natural Gas Rates Decided?
Natural gas prices differ worldwide as the determinants are internal and influenced by a country’s policies. As it is with every commodity, natural gas prices are also largely decided by the demand and supply equilibrium. However, once the natural gas price is set at the higher level of demand and supply, they are decided internally in India by the government which uses two factors; Administered Pricing Mechanism (APM) or market-linked price.
The Administered Pricing Mechanism is decided by the Indian government and used by the fertiliser and power sectors that use natural gas to manufacture products that contribute to the Gross Domestic Product of India. The APM price is deliberately kept low through subsidisation by the Indian government to ensure affordable natural gas prices for the Indian citizens.
The market-linked natural gas price is largely based on the international markets and depends on the country from which Indian companies import natural gas. Indian companies pay a market-linked price in the country’s currency from where the natural gas is imported.
What are the factors that influence the Natural Gas Price?
There are numerous factors that can influence the natural gas price on the Multi Commodity Exchange (MCX), which is where natural gas is traded. Here are the factors that influence the MCX natural gas price:
Demand: If the demand is greater than the supply, the natural gas price will increase. However, if the demand for natural gas is lower than the market supply, natural gas prices will decrease. Factors such as variations in weather, level of economic growth and supply and prices of other fuels can influence the demand and as a result, the MCX natural gas price.
Supply: If the supply is higher than the demand, the natural gas price will decrease. The vice versa is also true. Factors such as level of natural gas production, amount of natural gas in storage and volume of import and export of natural gas can influence the supply, and hence, the MCX natural gas price.
Economic Growth: If the economy is positive and accelerating, there is a higher demand for natural gas from various industries and sectors. If there is economic unrest, the demand may be cut by such sectors and industries. Depending on the existing supply of natural gas, the MCX natural gas price may fluctuate.
Storage: Natural gas storage helps meet sudden or seasonal demand for natural gas. The amount of stored natural gas also influences the MCX natural gas price as the storage can absorb the excess supply or help in meeting the natural gas demand.
Advantages of Trading in Natural Gas
As natural gas is used as a raw material to meet energy demands or for manufacturing, it is the most used form of energy to generate power. Hence, trading natural gas based on the MCX natural gas live price can be highly beneficial for investors. Here are the benefits of trading in natural gas:
Volatility: Natural gas prices depend on various dynamic factors. However, this volatility is a positive sign to let investors benefit from the price difference. The MCX natural gas price live also changes based on these factors and allows investors to make good profits with positive price fluctuations.
Diversification: Commodities, have an inverse relationship with other asset classes and are not influenced by the performance of such asset classes. It makes commodities such as natural gas an ideal investment option to ensure a diversified portfolio. In the case other asset classes are going through a bear phase, trading in natural gas can ensure profits.
Liquidity: MCX natural gas live price changes regularly. It means that an investor trading in natural gas can sell instantly without waiting for interested buyers. Similar to high trading stocks, natural gas contracts can also be sold immediately to realise cash.
Inflation: Natural gas trading through MCX natural gas live price offsets the negative consequences of inflation. If a country has a high rate of inflation, asset classes such as equities can depreciate heavily in value. Hence, trading in natural gas can ensure that investors are protected against inflation by hedging against the incurred losses in other investments.
How to Invest in Natural Gas?
The first step in the process of investing in natural gas is to open a Demat account along with a derivative account with a stockbroking firm. Once you have opened both of the accounts, you can choose from the following methods to invest in natural gas:
Futures Contracts: Futures contracts are derivative contracts that allow two parties to buy or sell a predetermined quantity of a particular asset such as natural gas at a predetermined price on a predetermined future day. With the derivatives account, you can enter a natural gas futures contract that will have MCX natural gas price attached and natural gas as the underlying asset. You can settle the contract anytime before the expiry date.
Stocks: The equities market is highly preferred by retail investors and provides a convenient way to invest in natural gas. You can identify companies that are included in the production and supply of natural gas. Such companies are listed on various stock exchanges and can be invested in through a Demat and a trading account.
Index Mutual Funds: Index mutual funds create a basket of securities and invest the pooled amount from investors in various companies’ stocks to track the performance of a specific index. You can invest in index mutual funds that track the performance of NIFTY Energy, which is an index that includes companies belonging to the petroleum, gas and power sectors.