# Presentation: 111861

## 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**

## Futures Market

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

## 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) **

## 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**

## 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**

## Futures Contract Standards

**Contract guarantees...**
**Payment**
**Location**
**Quality**

## Daily Settlement Prices

## 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 **

## NYMEX Energy Futures Website  (www.quotewatch.com/exchanges/nymex_cs)

## What Effects the Natural Gas Market...

**Fundamentals**
- Supply: production, stocks, pipeline capacity, and location
- Demand: weather, application or process
- Seasonality: change of seasons, stock mgt.

**Externals**
- Legislation
- Environmental Areas
- OPEC
- News/Rumor
- New Technology

## Natural Gas: 10 yrs. on NYMEX

**Natural Gas: 10 yrs. on NYMEX**
**Volume Continues to Grow  **

## 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.     **

## 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**

## Market Terms ...Basis

**Basis:**** The difference between the current spot price of natural gas and the futures price **

## Market Terms...Strip Price   

**Strip Price: Average of the daily settlement price of the next 12 months futures contracts...**

## Strip Price Computed from the Reuters NYMEX Report

-        Month

-          Price

-       March

-         6.158

-        April

-         5.861

-        May

-         5.642

-        June

-         5.612

-        July. etc

-         5.632

**(2001)**

## 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.

## 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.

## 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...

## Hedging Results: 1. Sept close is $5, spot Sept deliv is $5, prod gets desired result.

**Other Results**

## Futures Market Pricing Patterns

**Contango Pricing:**
- A market situation in which prices are progressively higher in the succeeding delivery months than in the nearest delivery month.

## Futures Market Pricing Patterns 

**Backwardation Pricing:** Is a market situation in which prices are progressively lower in the distant delivery months. (May also be called an “inverted market”).

## Natural Gas Futures Contract Closes During Bidweek

**When the bulk of trading may occur near the end of the month,e.g. March, 2001 contract closes on February 27.****     **

## Natural Gas Futures MarketParticipants Share in 2000

**2000**

## 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?    **

## 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.

## 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

## Other Energy Futures Markets

## Where are they located*?

***Markets Found on the Internet**

## 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**

## Energy Futures Contracts   Traded

**NYMEX**
**Light Crude Oil **
**Heating Oil**
**Unleaded Gasoline**

**Natural Gas**
**Propane**
**Heavy Crude Oil**
**Electricity**

## Energy Products Traded 

**IPE**
- Brent Crude Oil
- Gasoil
- Unleaded Gasoline
- Natural Gas

**SGX-DT**
- Crude Oil
**SFE**
- Electricity

## Requirements and ProceduresSGX-DT (crude oil contract)

- Months - 12,  next
- Quarterly cycle, Mar, June, Sept, Dec
- Close on the 15th
- $ Limits $15
- No limit last day or 30 min. before close

- Delivery per contract
- Price set at IPE
- Cash payment due prior to delivery

**(www.simex.com/sg)**

## Natural Gas Futures Market Recap:

**Futures Market Requirements**
**Market terminology**
**Market participants**
**Trading strategy - hedging**
**Price connection w/spot (physical Mkt.)**
**World Markets**