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About Me

Darren Winters is a self made investment multi-millionaire and successful entrepreneur. Amongst
his many businesses he owns the number 1 investment training company in the UK and Europe.
This company provides training courses in stock market, forex and property investing and since
the year 2000 has successfully trained over 250,000 people.

Thursday, 19 June 2014

Energy Series: Natural Gas

Natural gas has been known to man since 1,000 years before Christ. The Oracle of Delphi in ancient Greece was built around a flame that arose from a seepage of natural gas. It is thought that the gas was set alight by lightening but the ancient Greeks were puzzled and amazed by it and believed it came from divine intervention. The Chinese were able to transport gas arising from seepage with the use of bamboo pipe lines. They then, in 500 BC, used the flames created to boil sea water for drinking water.

Natural gas was found and identified in America in 1626 when the French discovered the local indigenous population lighting gas seepage around Lake Erie. In 1821 William Hart noticed bubbles of gas coming to the surface and dug a 27 foot well in Fredonia New York to obtain a larger flow. A self-styled Colonel Drake dug the first natural gas and oil well in the Lake Erie area when he dug down just 69 feet in 1859.

Manufactured gas was produced from coal and first commercialised in 1785 in Britain when it was used to light houses and streets. The Americans followed in 1816 in Baltimore and also used the gas to light the streets.

Gas continued to be used as a source of light throughout the 19th century until Robert Bunsen invented the Bunsen burner which opened up the opportunity to use gas for cooking and heating. Pipelines were then built and gas was used in many more applications with the development of gas cookers, water heaters, boilers and many uses in manufacturing and processing plant.

Natural gas is a commodity that trades in a similar way to oil and is the third largest physical commodity futures contract by volume in the world. Natural gas is a fossil fuel found in deep underground rock formations formed when layers of buried animals, gases and plants buried beneath the ground are exposed to intense heat over many thousands of years. It is a non-renewable source of energy and a bi-product of oil production, however it has its own uses for everyday life in heating and cooking and its price is very much driven by supply and demand. During cold winters the price will rise as demand to heat homes and businesses rise and although summer is usually the period when demand is low, excessively hot periods will also cause the price to rise as air conditioning units are turned up high. Natural gas prices are also affected by adverse weather conditions such as hurricanes as most of the production occurs in and around the Gulf of Mexico and the rigs will be closed down for safety reasons once storm warnings are in force.

Natural gas is a hydrocarbon and once extracted it contains other products such as propane, butane and helium that are extracted from the methane in order to make it commercially viable. It is considered to be an efficient and environmentally friendly fuel as it is the cleanest burning fossil fuel. One barrel of oil has approximately six times the energy content of natural gas.

Almost a quarter of the United States energy consumption is made up from natural gas and the US consumes approximately 25% of world production. It is transported around the country by pipelines. The US is a net importer of natural gas consuming all of its own production and importing the balance mainly from Canada. The first country to extract natural gas in 1825 was the United States.

It is estimated that there is 50 years’ supply of natural gas in the world and, in addition there are 900 trillion cubic metres of unconventional gas available for extraction of which only 180 trillion may be recoverable. The world’s consumption in 2015 will be 3.4 trillion cubic metres of gas per year meaning that world stocks should be sufficient to last 100 years.

Natural gas is the cleanest of fossil fuels, is easy to obtain and to transport, and it is therefore being used more and more by nations in order to keep down their carbon emissions and the cost of energy. It is difficult to store natural gas unless it has been converted to liquid natural gas and huge tankers are necessary in order to transport it around the world.

Natural gas has hit the headlines recently as fears have grown over the dispute between Russia and Ukraine which could threaten supplies to Europe. Russia stopped supplies to Kiev following a dispute over Ukraine’s unpaid gas debts of almost $5 billion which it is refusing to pay. Nearly a third of Europe’s gas demand is met through imports from Russia and it is estimated that half of this is fed through Ukraine. This is not the first time that supplies through the area have been halted following similar instances in 2006 and 2009. Approximately 15% of Europe’s demand is dependent upon Russian gas delivered via Ukraine. If Europe is unable to satisfy its needs from this source they could need to buy higher priced liquefied natural gas in order to meet demand. However Europe is currently sitting on its biggest gas inventories in 3 years with their storage facilities operating at around 65% full at present which is currently sufficient to meet demand.

Natural gas can be traded either directly, or through Exchange Traded Funds (ETFs) or through the shares of companies that process natural gas such as Centrica in the UK.

Natural gas is traded internationally and every week the US reports its gas inventory levels on a Thursday afternoon compared to the previous week. Natural gas is measured in cubic feet and is usually reported in billions of cubic feet (or Bcf).

Natural gas is traded on the New York Mercantile Exchange (NYMEX), US Futures Exchange, Intercontinental Exchange (ICE) and Multi Commodity Exchange (MCX) and the price is quoted in cents per million Btu (mmBTU). A futures contract for natural gas would be traded in 10,000 million British thermal units (Btu) with a tick size of 0.1 cents per mmBTU or $10 per contract. The price of natural gas can be extremely volatile and it is therefore wise to use a good risk management strategy if trying to trade it.


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