Introduction
Oil and natural gas are often seen as a set, given their numerous commonalities. Both are fossil fuels, both power industries, and both frequently dominate energy market headlines. Yet, their price movements are often anything but parallel.
This guide breaks down how to invest in natural gas and how it compares to oil, examining the key differences between the two commodities, why their prices diverge, and how that affects investment strategy. Understanding these nuances can help investors make smarter, more informed choices in a dynamic energy market.
Natural Gas vs. Oil: Key Market Differences
Market Structures
Oil is a global commodity in that its growth and prices are impacted by global phenomena, including international relations, conflicts, and trade agreements. Key benchmarks such as West Texas Intermediate (WTI) vs Brent Spreads, i.e difference between US and global crude oil price benchmarks, also reflect this worldwide supply and demand network.
The natural gas market, by contrast, has historically been more regional. Prices in the U.S. can differ sharply from those in Europe or Asia due to limited transport and storage capacity. While liquefied natural gas (LNG) exports are expanding transport possibilities, the markets of natural gas continue to be affected more by local/regional factors than global trade.
Storage Dynamics
Understanding natural gas’s storage influence on global markets can help understand how it impacts prices of the commodity. Natural gas storage is complex and crucial to the product’s integrity. Gas must be compressed and stored underground in large, specialized facilities, unlike oil, which can be kept in tanks. The storage and transport needs impact the supply chain, making gas less mobile than oil, i.e, the supply is commonly local and less flexible. Seasonal injections and withdrawals directly influence gas prices and investor sentiment.
Seasonal Demand Cycles
Oil demand is positively linked to industrial and economic growth, often peaking when travel and transport rise. Natural gas demand spikes are more seasonal, for example, in winter for heating and sometimes in summer for electricity generation. These opposing cycles can lead to different price trends throughout the year.
Historical Trends in Natural Gas and Oil Prices
Over the past two decades, oil and gas have frequently decoupled. The shale revolution in the 2000s caused natural gas prices to plunge, even as oil climbed above $100 per barrel. Similarly, the 2020 pandemic crash hit oil much harder, briefly sending prices negative, while natural gas stayed relatively stable.
These patterns remind investors that while oil and gas are connected industries, their pricing behavior often diverges, giving an edge to investors who understand and diversify their portfolios based on these differences.
Why Natural Gas Prices Don’t Always Move with Oil
While both oil and gas share some demand drivers, they respond to very different market pressures. Weather patterns, LNG exports, and domestic storage levels often move natural gas prices independently of oil.
Simply put, natural gas markets are more localized and weather-sensitive, while oil trades in a truly global ecosystem, impacted by geopolitical factors such as conflicts and economic growth.
For example, a cold winter in North America can tighten natural gas supply even when oil prices are falling. Conversely, global geopolitical events may send oil prices soaring while natural gas prices remain steady.
Investment Implications of Natural Gas and Oil Divergence
For investors, the main takeaway is to study the differences without assuming both oil and gas assets will follow the same trajectory.
When oil prices rise, natural gas investments don’t necessarily follow. The two can perform differently depending on storage trends, regional demand, and policy changes. During years when oil underperforms due to global supply gluts, natural gas may still benefit from domestic heating demand or tight storage conditions. Similarly, gas may remain stable when demand for energy resources increases due to difficulty in increasing transport, while oil prices soar.
Smart investors use this decoupling to diversify—holding both oil and gas exposure to balance out risk and volatility.
How to Invest in Natural Gas Amid Price Volatility
Natural gas prices can move quickly due to weather or supply shocks. Hedging with futures, maintaining portfolio diversification, and tracking the oil-to-gas price ratio are key strategies to manage the volatility independent of oil demand factors. Some tips to manage risk and build a natural gas-focused portfolio include:
ETFs That Track Natural Gas
Exchange-traded funds (ETFs) are a good avenue to gain exposure without trading futures directly. Some ETFs track natural gas prices or indices, while others focus on producers. Look for funds that separate gas from oil exposure to begin trading in natural gas.
Companies Focused on Gas vs. Oil
Invest in companies with a strong gas portfolio—exploration, production, or pipeline firms focused on gas transportation or supply rather than an oil focus. These include major natural gas producers or midstream operators that move gas through pipelines, such as EQT Corporation and Kinder Morgan.
Diversified Energy Funds
If you want both oil and gas exposure, diversified funds balance holdings across the energy sector, ensuring resilience against the price swings of either commodity.
While building a natural gas portfolio, investors must also consider their regional exposures. U.S. gas markets behave differently from global LNG markets, which are more tied to international demand. Study specific market factors and trends before committing to any investment avenue.
Future Outlook: Gas vs. Oil in the Energy Transition
As the world moves toward net-zero emissions, oil demand growth is expected to slow down, possibly plateauing by the 2030s. Natural gas, however, may continue rising as it is a cleaner-burning fossil fuel, positioning it as a bridge fuel supporting renewable energy.
Market trends support this prediction as LNG exports, especially to Europe and Asia, are expanding U.S. market influence. While renewables will eventually take center stage, natural gas remains an essential component of global energy security for the next few decades.
Conclusion
Oil and natural gas share the same origins but follow different market rhythms. Understanding how their prices move can help you craft a smarter, more balanced portfolio.
If you’re exploring how to invest in natural gas, understanding the oil market is important, but it is not the only factor dictating gas markets. Their differences may be your biggest opportunity.
FAQs
Why is natural gas often cheaper than oil?
Natural gas has more localized markets and higher supply, especially in the U.S., due to the shale gas boom, which keeps prices lower.
Do natural gas and oil stocks move together?
Not necessarily. Oil and gas stock prices depend on different market factors such as weather, storage, and geopolitical risks, leading to diverging price trends.
How do LNG exports affect natural gas investments?
LNG exports connect U.S. gas to global markets, making prices more sensitive to international demand and shipping constraints.
Can you invest in both oil and gas for balance?
Yes. Many investors choose to include both assets in their portfolio to diversify exposure within the energy sector.