It’s often said that in order to be a successful day trader, one must master technical analysis and focus only on patterns, charts, and trends. The fundamental analysis, though, is usually left out of the conversation, which is not necessarily a good thing, because fundamental analysis can often be very helpful, particularly with industries that are impacted by macro-level events.
One group of stocks that falls under this category is gas stocks. As a commodity, gas prices are affected by a lot of factors, such as events and developments in the main gas-extracting regions as well as demand from other industries such as manufacturing (e.g., steel, food, cars) and power generation.
In 2017, around 3,700 billion cubic meters of gas were produced around the world, most of which came from the US, which accounted for 20% of the total. While the US is a relatively stable region and is also the largest consumer of natural gas, in other major gas-extracting regions there are more uncertainties that come into play. Saudi Arabia, Iran, and Russia regularly make headlines on the back of various conflicts both within the respective countries and regionally. For example, Iran has the second-largest gas reserves in the world, but the sanctions recently re-instated by the US government will have a negative impact on the country’s ability to fully take advantage of its potential. Iran is still one of the largest producers and exporters of natural gas, but many of its international projects are in jeopardy, as sanctions might prevent it from getting the foreign investment it needs to develop its natural gas projects.
Because of the fast pace of events, day traders can swoop in and take advantage of the developments in gas-extracting regions to scoop up some profits. For example, on April 22, Natural Gas Futures inched up to $2.526 from $2.490 amid reports that the US would impose sanctions on Iran. As news about tougher sanctions continued to emerge over the following days, prices continued to move higher as commodity traders expected the supply of natural gas to decline due to lower exports from Iran.
The price of oil futures might seem like a more important piece of information for commodity traders, but stock traders can also take advantage of it. Gas prices affect a variety of companies from different industries. Producers generate more revenue from higher prices, while companies that need gas for their operations incur higher costs, which means their revenue is likely to decline. In turn, fluctuations in costs and revenue affect these companies’ stock prices. In light of this, here are some suggestions on how one can day-trade gas prices by taking fundamental factors into account.
The first and foremost thing is to get the big picture and study the gas industry at the macro level. The best place to start is to get oneself acquainted with the situation in the main gas-producing and exporting regions, such as the US, the Middle East, and Russia. Once a trader knows the situation, they know what developments to pay most attention to, such as sanctions.
The next step would be to identify the main consumers: the US, the EU, China, Russia, India, etc. As emerging markets develop their industry base, they’ll likely increase their gas consumption and import requirements. For example, India is expected to be among the countries that will increase their gas demand the most in the next couple of decades.
Getting the big picture is important because it can help establish some trends. Think of looking at the main gas-producing and consuming countries in a similar way to looking at stock indexes and ETFs.
“I’m a trader, so I use ETFs like $SPY for S&P500 or $QQQ for Nasdaq as the best indicators for the market directions. I always tell my students, ‘The trend is your friend.’ So if you are trying to long a tech stock, for example, you must use the Nasdaq ETF as an indicator of where the trend is going. If it’s going red, it’s often better to avoid longing the tech stock.” So said Meir Barack, founder of one of the world’s largest day-trading academies, Tradenet. Barak’s Tradenet Day Trading Academy offers a range of day trading courses on technical analysis with funded trading accounts and a YouTube trading channel where he explains some aspects of technical analysis and conducts daily live streams of his trading.
Once we’ve established the situation in the regions, we should identify the best stocks to trade. Here we can also split them by suppliers and consumers. On the suppliers’ side, we have companies that are engaged in exploration, extraction, transportation, and other aspects. A suggestion would be to avoid large-cap companies, such as British Petroleum plc (NYSE:BP) or Exxon Mobil Corporation (NYSE:XOM), because these companies have highly diversified business models, and therefore their stocks are less likely to be affected by developments in one particular region in the short run.
On the other hand, small companies such as Yuma Energy Inc. (NYSE:YUMA) or Mid-Con Energy Partners LP (NASDAQ:MCEP) have stocks trading below $1, which makes them more susceptible to large fluctuations.
A trader can also look at the stocks of companies with significant exposure to certain regions. Continuing with our example of Iran, we should mention Total SA (NYSE:TOT). The French oil company had a major contract for the South Pars gas project, which it had to abandon last year because of sanctions. When the US announced its withdrawal from the nuclear deal in May 2018, Total’s stock tanked amid concerns that it would have to abandon the project.
On the side of consumers, the most important industry is power generation, since most natural gas is used for electricity production. Here again, there are plenty of choices for traders among both large and small companies. Two of the largest electric utilities companies are Duke Energy Corporation (NYSE:DUK) and NextEra Energy Inc. (NYSE:NEE). Among small-cap names, we can identify Black Hills Corp (NYSE:BKH) and AES Corp (NYSE:AES).
In addition to the above, a trader should keep in mind that natural gas is also used as a raw material for a variety of products such as plastic, chemicals, and fertilizers, and hence there might be some interesting day-trade plays in these industries as well.
Disclosure: None. This article was originally published at Insider Monkey.