Industrial Uses Drive the Natural Gas Commodities Market - dummies

Industrial Uses Drive the Natural Gas Commodities Market

By Amine Bouchentouf

The industrial sector is the largest consumer of natural gas commodities, accounting for almost 40 percent of total consumption. Although industrial uses of natural gas have always played a major role in the sector, their significance has increased during the last several years and will continue to do so.

The industrial sector has always accounted for a large part of natural gas use, and because this trend will continue, it’s a good area to consider investing in. (Actually, demand for natural gas products as a whole will increase throughout the first quarter of the 21st century.)

[Credit: Source: Energy Information Administration]
Credit: Source: Energy Information Administration

Increased industrial demand should put upward price pressures on natural gas. One way to profit from this demand is by being long natural gas futures.

As an investor, looking at long-term trends helps you develop an investment strategy that takes advantage of the market fundamentals.

So what specific parts of the industrial sector use natural gas? Natural gas is a truly versatile form of energy because it has many applications in industry. Consider a few industrial applications of natural gas products:

  • Feedstock for fertilizers

  • Food processing

  • Glass melting

  • Industrial boiler fueling

  • Metal smelting

  • Waste incineration

The chemical composition of natural gas consists primarily of methane, a hydrocarbon molecule. It also includes other hydrocarbons, such as butane, ethane, and propane — all gases that have important industrial uses.

When the industrial sector is firing on all cylinders, so to speak, demand for natural gas tends to increase. Keep an eye out for increased activity from the industrial sector because this is a bullish sign for natural gas.

One indicator you can use to gauge the economic output from the industrial sector is the Producer Price Index (PPI). The PPI measures the average change in prices producers get for their products, expressed as a percent change. The PPI, compiled by the Bureau of Labor Statistics (BLS), is a good measure of the health in the industrial sector.