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Natural Gas

After oil, natural gas has the second most active futures market in the energy space, and is probably the second most important energy source globally. Natural gas is created by the anaerobic breakdown of organic material; as plant and animal matter rot, natural gas is created. The gas is primarily methane, but contains other gases as well: ethane, butane, etc.

Gas is often found in conjunction with oil at oil fields; those flames you see are natural gas vents. Oil companies that are unprepared to harvest gas simply burn it off to get rid of it. Aside from oil fields, it can also be found in stand-alone natural gas deposits, coal beds or even landfills. The largest producers are the U.S., Russia, Finland and the U.K., but the largest reserves are located in the Middle East; Qatar has an offshore field with over 900 trillion cubic feet of gas.

Natural gas supporters say that it is a cleaner-burning fuel, and that it is found in more geopolitically stable regions of the world than oil; detractors point out that it can explode, and that pick-up of interest in natural gas has been slow.

The natural gas markets tend to be extremely volatile, with prices often swinging on average over 2.7% per day, according to the IEEE. Natural gas' monthly standard deviation is also larger (51.8%) than oil (38.9%), according to the same statistics. Pricing trends are also strongly seasonal, with prices tending to rise in September in anticipation of the Northeast winter, and then fall in the summer.

The biggest players in the natural gas market are EnCana (ECA), XTO Energy (XTO) and EOG Resources (EOG), although there are many other smaller players. Beyond that, investors can tap into the market through the US Natural Gas ETF (UNG), which holds a rolling futures position in natural gas. The iPath Natural Gas ETN (GAZ) offers another choice.

NYMEX: NG

Gasoline

We all know about gasoline. The price of gasoline hits almost every American directly at the pump. And while those prices incorporate a lot more than just the spot price of gasoline on the futures market, including taxes and the gas station profit, we should all care about gas futures prices because they impact us directly.

Gas is an oil distillate, meaning it is created by distilling down crude oil at an oil refinery. As such, prices are linked to the price of crude. The relationship is not exact, however, because the cost and profit of refining oil into gas varies over time. The difference between the price of oil and the price of gas is called the 'crack spread,' referring to the process of 'cracking' oil down into its different parts: gas, heating oil, aviation fuel, kerosene, etc.

Many attribute the current high price of gas not just to the high price of oil, but to constraints in the U.S. refining industry. Few-to-no new oil refineries have been built in the U.S. in the past few decades, due to (depending on whom you ask) NIMBY politics or the desire by big oil companies to lock in fat profits in the refining center.

As far as investing in gasoline, a U.S. investor's best choice is to access the market directly via the futures market; the leading gas contract is the NYMEX's RBOB Gasoline (RB), which incorporates a 10% ethanol blend.

Heating Oil

Heating oil is the final player in the market, and like natural gas, is known for a seasonal trading pattern tied to the ebb and flow of the New England winter: prices tend to jump in the fall in anticipation of winter demand, and fall off in February and March as need for the fuel falls.

Heating oil trades in the largest volume on the NYMEX under the ticker HO.

Coal

Coal gets special mention. It is a critical energy source, particularly in the U.S., which is richer in coal than in any other type of fossil energy. But for a variety of reasons, coal futures do not currently exist - at least not a truly liquid market for coal futures. Investors interested in playing with this dirty old fuel are left buying the shares of coal-mining companies like Arch Coal (ACI) or Peabody Energy (BTU).

There's a great deal of interest currently in developing cleaner-burning coal, although this remains more rhetoric than reality. Still, people are investing huge sums of money to make it happen, and if it does, coal use (and prices) could jump significantly.