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Natural Gas Futures Market

James Todaro

February 2001

Bangladesh Ministry of Energyand Mineral Resources

[email protected]



2

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



3

Futures Market

A location where trading (buy-sell) in

commodities is conducted in accordance

with specific rules, procedures, and

guarantees.



4

What is a Futures Contract?

It is a standardized contract for the purchase

or sale of a commodity.

Traded for f uture delivery under provisions of

exchange regulations.

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

dollars (or other currency)



5

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



6

Futu

res Contract Elements The f utures contract must be tied to a

physical commodity which is f ungible

The underlying commodity must be

widely traded in free unregulated

markets

Price variability/volatility must exist



7

Futures Contract Standards

Contract guarantees«

Payment

Location

Quality



8

Daily Settlement Prices

Daily Near-Month Contract Settlement Prices

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

D o l l a r s p e r M

1998

19992000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov



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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



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NYMEX Energy FuturesWebsite(www.quotewatch.com/exchanges/nymex_cs)

Month2001

Open $ High $ Low $ Setl/last

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



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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



N a t ur al G a s : 1 0

yr s . on NYMEX

V ol um

e C on t i n u

e s t o Gr o w

M o

n t hl yT o t al s of C on t r

a c t sTr a d e d

0

5 0 0 , 0 0 0

1 , 0 0 0 , 0 0 0

1 , 5 0 0 , 0 0 0

2 , 0 0 0 , 0 0 0

2 , 5 0 0 , 0 0 0

Apr-90Jul-90

Oct-90

Jan-91

Apr-91

Jul-91

Oct-91

Jan-92

Apr-92

Jul-92

Oct-92

Jan-93

Apr-93

Jul-93

Oct-93

Jan-94

Apr-94

Jul-94

Oct-94

Jan-95

Apr-95

Jul-95

Oct-95

Jan-96 Apr-96

Jul-96

Oct-96

Jan-97

Apr-97

Jul-97

Oct-97

Jan-98

Apr-98

Jul-98

Oct-98

Jan-99

Apr-99

Jul-99

Oct-99

Jan-00

Number of Contr



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Futures Market Terms

Near-Month:The f utures 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.



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Market Terms...

Long (position): A member who has bought

f utures contracts

Short(position): A member who has sold f utures

contracts

Offer: A price a member will sell a contract



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Market Terms «Basis

Basis: The difference

between the current spot

price of natural gas and

the f utures price

Spot and Futures Prices

2

3

4

5

Mar Apr May

D o l l a r s p e r M M B t u

Spot Futures

Basis =$0.20



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Market Terms«Strip Price

Strip Price: Average of the daily

settlement price of the next 12 months

f utures contracts...



17

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)



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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.



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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.



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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...



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Hedging Results: 1. Sept close is $5,

spot Sept deliv is $5, prod gets desired result .

Market Sept Price Sell/Buy Gain/Loss

Spot 6.00 Sell +1 .00

Futures 6.00 Buy -1 .00

Spot 4.00 Sell -1 .00Futures 4.00 Buy +1 .00

Other Results



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Futures Market Pricing Patterns

Contango Pricing:

A market situation in

which prices are progressively higher in

the succeeding

delivery months than

in the nearest deliverymonth.

Contango Pricing Series

0

1

2

3

4

5

6

Aug Sept Oct Nov Dec

D o l l a r s p e r M M B t u



23

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

³inverted market´).

Backwardation Pricing Series

0

1.5

3

4.5

6

Jan Feb Mar Apr May

D o l l a r s p e r M M B

t u



24

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.

Bidw k - on h on , p o 1999

0

50

100

150

200

250

O o J n

o n

i n 1 , 0

0 0 '

2nd wk 4

h wk



25


Participants Share in 2000

n Users

0.9%

Gas Pr cess rs

0.3%

,D,C,s

. %

Financial

.2%

Fun s

4. %Fl r ra er

. %In est rs

3. %

Marketers

8. %

Pr ucers

8.4%

2000



26

Marketers and Financials Dominated

NYMEX Natural Gas Trading in 2000

With over 0 of trades last year, these

groups continue to be the most active

players in the NYMEX natural gas

f utures market. Who are they?



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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.



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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



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Other Energy Futures Markets



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Where are they located*?

*Markets Found on the Internet



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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



32

Energy Futures Contracts

Traded

NYMEX

Light Crude Oil

Heating Oil

Unleaded Gasoline

Natural Gas

PropaneHeavy Crude OilElectricity



33

Energy Products Traded IPE

Brent Crude Oil

Gasoil

Unleaded Gasoline

Natural Gas

SGX-DT

Crude Oil

SFE

Electricity



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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 30min. before close

Delivery per contract

Price set at IPE

Cash payment dueprior to delivery

(www.simex.com/sg)



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Recap: Futures Market Requirements

Market terminology

Market participants

Trading strategy - hedging

Price connection w/spot (physical Mkt.) World Markets

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