Natural Gas: A Guide to India’s Trading Market

This fossil fuel, composed of a large portion of methane, is stored deep within underground rock layers. In our pursuit of energy security, this 'bridge fuel' plays a pivotal role in powering industries, manufacturing fertilisers, and meeting our domestic needs. India has become a large importer of Liquefied Natural Gas (LNG), thus becoming a key player in the energy scenario across the world. 

Natural gas in India is a rapidly growing commodity market, driven by the government’s target to increase its share in the energy mix from 6.7% to 15% by 2030. This presents investment opportunities. Investors can participate through direct trading on exchanges (MCX), investing in energy stocks, or using specialised funds.

How is natural gas formed?

Natural gas is extracted from porous rock formations by decomposing of fossil marine life for over million years. While methane is the main performer, other players include ethane, propane, and butane. In its natural state, natural gas is both odourless and colourless, although a strong chemical called mercaptan is added so that anyone can smell it instantly if leaked.

The Indian supply chain

India is the world’s 7th largest producer and natural gas supply chain relies on a combination of domestic production and imported liquefied natural gas (LNG). Domestic gas is produced from offshore and onshore fields and transported through a growing pipeline network to industries such as fertilisers, power generation, refineries, and city gas distribution. However, domestic production is not sufficient to meet demand, so nearly half of India’s natural gas requirement is fulfilled through LNG imports. The LNG is imported via specialised terminals, regasified, and then distributed through pipelines across the country. As the demand is increasing, India is expanding LNG terminals, pipeline infrastructure, and city gas networks, which are expected to play a key role in achieving the government’s goal of increasing natural gas’s share in the energy mix to 15% by 2030.

Trading on NSE and MCX

National Stock Exchange (NSE) and Multi-Commodity Exchange (MCX) are the primary exchanges for trading derivatives on natural gas. The two exchanges offer cash-settled futures contracts that closely mirror NYMEX Henry Hub futures, but quoted in Indian Rupees. The NSE is geared towards institutional players, with its 1,250 mmBtu contract size, whereas the MCX Mini is geared towards retail traders.

What moves the market?

As a fact, natural gas may be highly volatile commodity. Its prices are subject to the following factors:

• Weather patterns: Severe weather conditions, especially in the winter, cause a spike in gas consumption, while hot summers cause a spike in electricity consumption.
• Inventory reports: Weekly US inventory reports, released every Thursday, cause a volatile reaction in prices.
• Geopolitics: Events in major gas production centers, including OPEC+ policies, affect prices.
• Alternative energy: The rise of alternative energy serves as a long-run ceiling to gas prices.

Strategic hedging

Apart from speculation, derivatives trading is also used by participants to offset exposure arising from underlying price movements.

• Producers protect themselves from prices going down by shorting the market. If prices go down, they make more profit on the exchange than they would have sold at the physical market.
• Industrial Consumers, such as a glass or fertiliser plant, go long to protect themselves from prices going up too high.

Conclusion

Though gas is cleaner than coal, it is facing stiff rivalry from green energy sources. Nevertheless, based on the projections set for the year 2026, gas is set to remain an integral part of the energy mix. For traders, the high volatility means that there is a need to manage margins between 15% and 35% in this 'blue flame' energy market.