Natural Gas Futures Market
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Transcript of Natural Gas Futures Market
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Natural Gas Futures Market
James TodaroFebruary 2001
Bangladesh Ministry of Energy and Mineral Resources
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Presentation Objectiveswhat is... Futures Market/Contract Market Term(s) Pricing pattern(s) Whose in Natural Gas Futures Market Difference from Spot Market Worldwide Energy Futures Markets
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Futures Market A location where trading (buy-sell) in
commodities is conducted in accordance with specific rules, procedures, and guarantees.
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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)
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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
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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
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Futures Contract Standards Contract guarantees…
Payment
Location
Quality
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Daily Settlement Prices
Daily Near-Month Contract Settlement Prices
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
Do
lla
rs
pe
r M
MB
tu
1998
1999
2000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
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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 Futures Website (www.quotewatch.com/exchanges/nymex_cs)
Month2001
Open $ High $ Low $ Set’l/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
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Natural Gas: 10 yrs. on NYMEXVolume Continues to Grow
Monthly Totals of Contracts Traded
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
Apr-
90
Jul-90
Oct-
90
Jan-9
1
Apr-
91
Jul-91
Oct-
91
Jan-9
2
Apr-
92
Jul-92
Oct-
92
Jan-9
3
Apr-
93
Jul-93
Oct-
93
Jan-9
4
Apr-
94
Jul-94
Oct-
94
Jan-9
5
Apr-
95
Jul-95
Oct-
95
Jan-9
6
Apr-
96
Jul-96
Oct-
96
Jan-9
7
Apr-
97
Jul-97
Oct-
97
Jan-9
8
Apr-
98
Jul-98
Oct-
98
Jan-9
9
Apr-
99
Jul-99
Oct-
99
Jan-0
0
Apr-
00
Jul-00
Oct-
00
Nu
mb
er
of
Co
ntr
acts
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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.
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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
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Market Terms …Basis
Basis: The difference between the current spot price of natural gas and the futures price
Spot and Futures Prices
2
3
4
5
Mar Apr MayD
olla
rs p
er M
MB
tu
Spot FuturesBasis =$0.20
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Market Terms…Strip Price
Strip Price: Average of the daily settlement price of the next 12 months futures contracts...
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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 -1.00
Futures 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 delivery month.
Contango Pricing Series
0
1
2
3
4
5
6
Aug Sept Oct Nov DecD
olla
rs p
er M
MB
tu
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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”).
Backwardation Pricing Series
0
1.5
3
4.5
6
Jan Feb Mar Apr MayD
olla
rs p
er M
MB
tu
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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.
Bidweek Near-Month Contracts,Sept to Dec 1999
0
50
100
150
200
250
Oct Nov Dec JanC
on
trac
ts in
1,0
00's
2nd wk 4th wk
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Natural Gas Futures MarketParticipants Share in 2000
End Users0.9%
Gas Processors0.3%
L,D,C,s1.7%
Financial6.2%
Funds4.7%
Floor Trader6.1% Investors
3.1%
Marketers68.6%
Producers8.4%
2000
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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?
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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.
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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
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Energy Futures Contracts Traded
NYMEX Light Crude Oil Heating Oil Unleaded
Gasoline
•Natural Gas•Propane•Heavy Crude Oil•Electricity
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Energy Products Traded IPE Brent Crude Oil Gasoil Unleaded
Gasoline Natural Gas
SGX-DT Crude Oil
SFE Electricity
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Requirements and ProceduresSGX-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)
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Natural Gas Futures Market Recap: Futures Market Requirements Market terminology Market participants Trading strategy - hedging Price connection w/spot (physical Mkt.) World Markets