Natural Gas Futures Market

James Todaro
February 2001
Bangladesh Ministry of Energy and
Mineral Resources

Jtodaro@eia.doe.gov
Presentation Objectives
what is...
 Futures Market/Contract
 Market Term(s)
 Pricing pattern(s)
 Whose in Natural Gas Futures Market
 Difference from Spot Market
 Worldwide Energy Futures Markets

2
 Futures Market
 A location where trading (buy-sell) in
commodities is conducted in accordance
with specific rules, procedures, and
guarantees.

3
What is a Futures Contract?
 It is a standardized contract for the purchase
or sale of a commodity.


 Traded for future delivery under provisions of

exchange regulations.

 It specifies: the unit of sale, how it is quoted in

dollars (or other currency)

4
Futures contract (cont’d.)
 Minimum and maximum fluctuations, when
and at what times traded

 Where delivery is made and over what period

 Penalties for failure to make delivery

5
Futures Contract Elements
 The futures contract must be tied to a
physical commodity which is fungible

 The underlying commodity must be

widely traded in free unregulated markets

 Price variability/volatility must exist

6
Futures Contract Standards
 Contract guarantees…

 Payment

 Location

 Quality
7
Daily Settlement Prices

$12.00
Daily Near-Month Contract Settlement Prices

$10.00

1998
1999
2000
D o lla r s p e r M M B t u

$8.00

$6.00

$4.00

$2.00

$0.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Dec

8
Contract Specifications

 NYMEX Natural Gas :

 60 Consecutive Months Forward
 10,000 MMBtu per Contract
 Delivery to the Henry Hub in
Louisiana
 No near-month daily limit
9
NYMEX Energy Futures
Website
(www.quotewatch.com/exchanges/nymex_cs)

Month Open $ High $ Low $ Set’l/last

2001

March 5.670 5.670 5.480 5.490

April 5.600 5.620 5.460 5.480

May 5.580 5.580 5.440 5.460

10
 What Effects the Natural Gas
Market...
 Fundamentals  Externals
 Supply: production,  Legislation
stocks, pipeline capacity,  Environmental Areas
and location  OPEC
 Demand: weather,  News/Rumor
application or process  New Technology
 Seasonality: change of
seasons, stock mgt.

11
 N umb e r of C o ntracts

1,000,000
1,500,000
2,000,000
2,500,000

500,000

0
Apr-90
Jul-90
O c t-90
Jan-91
Apr-91
Jul-91
O c t-91
Jan-92
Apr-92
Jul-92
O c t-92
Jan-93
Apr-93
Jul-93
O c t-93
Jan-94
Apr-94
Jul-94
O c t-94
Jan-95
Apr-95
Jul-95
O c t-95
Jan-96
Apr-96
Jul-96
O c t-96
Jan-97
Apr-97
Monthly Totals of Contracts Traded

Jul-97
O c t-97
Jan-98
Apr-98
Jul-98
Volume Continues to Grow

O c t-98
Jan-99
Apr-99
Jul-99
O c t-99
Jan-00
Apr-00
Natural Gas: 10 yrs. on NYMEX

Jul-00
O c t-00
12
 Futures Market Terms…

 Near-Month:The futures contract closest to

expiration-June will close in May

 Settlement Price: Daily price the market

settles all accounts on each month’s contract-
usually the last price of the day

 Bid: A price a member will pay for a contract.

13
 Market Terms...
 Long (position): A member who has bought
futures contracts

 Short(position): A member who has sold futures

contracts

 Offer: A price a member will sell a contract

14
 Market Terms …Basis
 Basis: The difference Spot and Futures Prices
between the current spot 5 Basis =$0.20
Spot Futures

price of natural gas and

Dollars per MMBtu

the futures price 4

Mar Apr May

15
Market Terms…Strip Price

 Strip Price: Average of the daily

settlement price of the next 12 months
futures contracts...

16
Strip Price Computed from the
Reuters NYMEX Report
Month (2001) Price

March 6.158
April 5.861
May 5.642
June 5.612
July. etc 5.632

17
More Market Terms...
 Forward Months: Future months or contracts
other than the near-month. (If Feb. is the near-
month, Mar, Apr, and May are the forward
months.)

 Volume: The number of purchases and sales of a

futures contract made during a specified period of
time, often the total transactions for for one
trading day.

18
Market Terms...
 Closing Price: The price at the end of trading on
the scheduled day that near-month contract
expires-also called the last price.

 Hedging: Offsetting the price risk present in a

spot market position by taking the opposite
position in the futures market.

19
 Examples Using a Hedging
Strategy
 A natural gas producer sees Sept. Futures Mkt. price is
$5.00 per MMBtu, he would like to sell and deliver gas in
the spot Mkt. in Sept. at $5. In order to lock in the $5
selling price, the prod. will enter the Futures Mkt.
obtaining a futures contract to sell gas in Sept. at $5.
When trading on the Sept. futures contract closes, the
prod. must offset (hedge) his position by obtaining a
futures contract to buy gas at the Sept. closing price.
Possible results...
20
 Hedging Results: 1. Sept close is $5,
spot Sept deliv is $5, prod gets desired result.
Other Results
Market Sept Price Sell/Buy Gain/Loss
Spot 6.00 Sell +1.00
Futures 6.00 Buy -1.00
Spot 4.00 Sell -1.00
Futures 4.00 Buy +1.00

21
Futures Market Pricing Patterns
 Contango Pricing: 6

 A market situation in 5
Contango Pricing Series

which prices are

Dollars per MMBtu

4

progressively higher in 3

the succeeding 2

delivery months than 1

in the nearest delivery 0

Aug Sept Oct Nov Dec

month.

22
 Futures Market Pricing Patterns
 Backwardation Pricing: 6

Is a market situation in 4.5

Backwardation Pricing Series

Dollars per MMBtu

which prices are
progressively lower in the
3

distant delivery months. 1.5

(May also be called an 0

“inverted market”). Jan Feb Mar Apr May

23
 Natural Gas Futures Contract
Closes During Bidweek
 When the bulk of Bidweek Near-Month Contracts,Sept to Dec 1999

trading may occur

250

2nd wk 4th wk

near the end of the

200

Contracts in 1,000's
150

month,e.g. March, 100

2001 contract closes 50

on February 27. 0

Oct Nov Dec Jan

24
 Natural Gas Futures Market
Participants Share in 2000
Funds Floor Trader
Financial 4.7% Investors
6.1% Producers
6.2% 3.1%
8.4%

L,D,C,s
1.7%

Gas Processors
0.3%

End Users Marketers

0.9% 68.6%

2000 25
Marketers and Financials Dominated
NYMEX Natural Gas Trading in 2000

 With over 80% of trades last year, these

groups continue to be the most active
players in the NYMEX natural gas
futures market. Who are they?

26
Natural Gas Futures Market
Leaders...
 Marketer:Sells gas, transportation, and
storage services. Marketers buy gas at the
wellhead and at markets or hubs for resale.
 Financials:Investment funds and others that
are in the market for short-term gains-rarely
take delivery.

27
 Other Market Participants

who are they?

 Producers:find and deliver the gas at the
wellhead
 End Users:the gas consumer
 Pipelines:carry gas to the end user
 LDC:local distrib co get gas to end-users
 Gas Plants:place where gas is prepped or
dried before entering pipeline system

28
Other Energy Futures Markets

29
Where are they located*?

*Markets Found on the Internet

30
Worldwide Energy Futures
Markets*
 United States: New York Mercantile
Exchange (NYMEX)
 UK: London International Petroleum
Exchange (IPE)
 Asia: Singapore Exchange-Derivatives
Trading (SGX-DT)
 Australia: Sydney Exchange (SFE)
*Results of Internet search
31
 Energy Futures Contracts
Traded
 NYMEX
•Natural Gas
 Light Crude Oil
•Propane
 Heating Oil •Heavy Crude Oil
 Unleaded Gasoline •Electricity

32
Energy Products Traded
 IPE  SGX-DT
 Brent Crude Oil  Crude Oil
 Gasoil
 Unleaded Gasoline  SFE
 Natural Gas  Electricity

33
 Requirements and Procedures
SGX-DT (crude oil contract)
 Months - 12, next  Delivery per contract
 Quarterly cycle, Mar,  Price set at IPE
June, Sept, Dec  Cash payment due
 Close on the 15th prior to delivery
 $ Limits $15
 No limit last day or 30
min. before close
(www.simex.com/sg)

34
Natural Gas Futures Market
Recap:
 Futures Market Requirements
 Market terminology
 Market participants
 Trading strategy - hedging
 Price connection w/spot (physical Mkt.)
 World Markets

35