How to Invest in Natural Gas

The natural gas industry is exploding across the globe. The head of the International Energy Agency (IEA) reports that profits for the oil and gas industry exceeded $4 trillion in 2022 — surpassing the average of $1.5 trillion in previous years. 

While such swings aren’t common, they can still spell big profits for savvy investors. This article will show you how to invest in natural gas.

Best Ways to Invest in Natural Gas

It’s important to note that you have several options for natural gas investing. Here are the best ways to pipe this fossil fuel into your investment portfolio.

Invest in Natural Gas Stocks

The most direct way to invest in natural gas is through natural gas stocks. This means seeking out companies like Cheniere Energy (LNG) that produce, export or otherwise deal directly with natural gas. 

Pros: 

• Can research individual companies
• Can choose a company that aligns with your values
• Have a better idea of what you own (as opposed to a fund)
• Easier tax management with individual stocks

Cons: 

• No diversification with a single natural gas company 
• Performance of one company won’t always match the whole industry
• Must research stock picks carefully
• Volatility can be risky with single stocks vs. a fund

Invest in Natural Gas ETFs

An exchange-traded fund (ETF) is a bundle of stocks not unlike a mutual fund. The major difference is that ETFs can be bought and sold directly on a major stock exchange, which gives them greater liquidity. 

A natural gas ETF contains companies that deal with the natural gas industry. Instead of investing in a single natural gas company, you’re investing in a collection of companies in that sector. 

Pros: 

• Give you ownership of multiple companies
• Greater diversity than single stocks
• Less pressure to perform careful research
• Can be traded on the stock market like any other stock

Cons: 

• Limited ability to hand-pick your own stocks
• Prices won’t experience the major swings of individual stocks
• Prices won’t always match the price of the underlying stocks
• Trading costs can add up with multiple trades

Invest in MLP Stocks

In Master Limited Partnerships (MLP), the investor serves as a limited partner in the business. By purchasing shares, you’ll provide the working capital needed to sustain the company, and in return, you’ll receive cash distributions based on the company's success.

Pros: 

• Higher distributions due to a favorable tax structure
• Historic record of higher returns
• Can be traded on a public exchange like regular stocks
• Allow investors to pump money into individual stocks

Cons: 

• Investors may face unfamiliar tax situations
• Greater volatility than other securities 
• Subject to legislation surrounding the oil and gas industry
• No diversification

Buy Natural Gas Futures

Natural gas futures are a derivative form of investing contracts. In a natural gas futures contract, you agree to trade the underlying asset for a predetermined price at a predetermined time. 

By entering into a futures contract, you’re speculating on the price of natural gas in the near future. This action aims to protect against unfavorable price changes in the underlying asset.

Pros: 

• Futures contracts protect against unfavorable price drops
• Possible option for risk-averse investors
• Predictable costs (as specified in the contract)
• Futures contracts are highly liquid for common commodities

Cons: 

• No control over natural gas prices in the future
• Contracts can expire worthlessly
• Futures contracts can fluctuate wildly

Invest in Natural Gas Wells

Investing in natural gas wells may seem reserved for massive energy corporations, but even individual investors can buy into this segment of the market. When you invest in wells, you can purchase fractional investments in natural gas and oil wells that have been vetted thoroughly, or you can buy directly into a well driller or management firm. While the platform only accepts accredited investors, it even helps you submit your accreditation paperwork.

Pros:

• Assets are carefully analyzed
• You can gain exposure to energy prices
• Allows you to diversify your energy investments

Cons:

• Energy prices and markets can be quite volatile
• This market seems to be exclusive to accredited investors

Best Natural Gas Investments

If you’re interested in learning how to invest in natural gas, you might consider investing in one of the following companies:

Remember to research each company before investing. When you invest in a single company, you should add this investment as part of a well-balanced, diversified portfolio.

Benefits of Investing in Natural Gas

Discovering how to invest in natural gas stocks and ETFs can make you a more successful, savvy investor. Here are some of the advantages of investing in the natural gas industry:

• Provides diversity to your portfolio
• Swings in gas prices may translate into profits
• May play a role in America’s energy transition
• Improving efficiency of natural gas companies

Natural gas is known for being a cleaner form of energy than other fossil fuels. This means the world may grow to depend on natural gas more in the coming years.

Risks of Investing in Natural Gas

Despite these advantages, there are inherent risks of investing in natural gas:

• Price fluctuations introduce risk
• Potential increased environmental regulations
• Industry subject to unpredictable markets and weather patterns
• May not lead to diversification

Investors may still pursue these investments if they select the right strategy.

Choosing the Right Investment Strategy

Choosing the right investment strategy can help you minimize risk while maximizing rewards. Here’s how to choose the right strategy.

Evaluate the Different Investment Strategies

Common investment strategies can include:

• Buy-and-hold for long-term investing
• Value investing
• Dividend investing
• Index investing
• Dollar-cost-averaging

Diversification is also an important way to keep your portfolio balanced and protect against risk.

Set Your Personal Financial Goals and Risk Tolerance

Your strategy should reflect your goals and risk tolerance. Are you aiming for long-term growth? Or are you more interested in a quick return on your investment? 

You also need to consider how much risk you’re willing to absorb. If you’re not comfortable with risk, you can pursue diversification by balancing your portfolio with stocks from other sectors or with an ETF.

Invest in Natural Gas Companies With Strong Fundamentals

When researching companies, make sure to look at key metrics such as:

• Cash flow
• Return on assets (ROA)
• Company earnings
• Competitive environment

Your goal should be to select a company with a strong track record or high potential for future gains.

Trading Natural Gas Contracts Based on Short-Term Price Fluctuations

Oil prices and gas prices tend to fluctuate dramatically and can be influenced by factors that include government regulations, geopolitical instability or weather patterns. These changes can translate into great gains, but they’re also a reason to adopt a hedging strategy when trading natural gas contracts.

Diversifying with ETFs for Broader Exposure to the Natural Gas Sector

ETFs provide you with built-in diversification since you’ll be purchasing a bundle of stocks rather than selecting each one individually. This feature gives you broader exposure to multiple companies within the natural gas industry — though it won’t give you diversity across sectors.

Where to Invest in Natural Gas

To find the best stock broker, consider one of the following:

You Can Invest in Natural Gas Today

Now that you know how to invest in natural gas, you’re ready to get started. Natural gas can bring high rewards but also high risk. Choosing the right investment and the right strategy can help you mitigate this risk while amplifying your rewards.

Frequently Asked Questions