Commodities: Natural Gas
Natural gas is used extensively throughout the U.S. to heat homes, and also has important applications in commercial and industrial settings. It is similar to what is referred to as biogas, which is methane produced from the breakdown of organic matter. Because it is a fossil fuel, it contains many secondary products that must be filtered out of the methane to render it commercially viable. Ethane, propane, butane, helium and hydrogen sulfide are removed and are considered a secondary income source for refiners.
Once considered an ineffective byproduct of oil production, natural gas is steadily finding a foothold in today's world. Economical, environmentally friendly and efficient, natural gas is the cleanest-burning fossil fuel, and technologies are improving the way it is captured, transported and distributed.
According to statistics published in 2009 by the Federal Energy Regulatory Commission, 96% of the world's natural gas reserves reside outside of the U.S., yet 25% of the country's energy comes from natural gas. (Find out how to stay on top of data reports that could cause volatility in these markets, in Become An Oil And Gas Futures Detective.)
A sample commodity futures contract for natural gas is shown in the following table.
|Natural Gas Contract Specifications|
|Ticker Symbol||Open Outcry: NG (NYMEX)
Electronic: ENG (eCBOT)
|Contract Size||10,000 million British thermal units|
|Deliverable Grades||Pipeline specifications in effect at time of delivery|
|Contract Months||All months|
|Trading Hours||NYMEX Open Outcry: Monday-Friday 9am-2:30pm EST
eCBOT Electronic: Sunday-Friday 6pm-5:15pm CST
|Last Trading Day||Trading terminates three business days prior to the first calendar day of the delivery month.|
|Last Delivery Day||Last business day of the contract month|
|Price Quote||Cents per million Btu (mmBtu)|
|Tick Size||NYMEX: .1 cents per mmBtu ($10/per contract)|
|Daily Price Limit
(Not applicable in electronic markets)
|1. $3 per mmBtu ($30,000 per contract) for all months.
2. If any contract is traded, bid, or offered at the limit for five minutes, trading is halted for five minutes. When trading resumes, the limit is expanded by $3 per mmBtu in either direction.
3) If another halt were triggered, the market would continue to be expanded by $3 per mmBtu in either direction after each successive five-minute trading halt.
4) There will be no maximum price fluctuation limits during any one trading session.
Understanding Natural Gas Contracts
Like every commodity, natural gas has its own ticker symbol, contract value and margin requirements. To successfully trade a commodity, you must be aware of these key components and understand how to use them to calculate your potential profits and loss.
For instance, if you buy or sell a natural gas futures contract, you will see a ticker tape handle that looks like this:
|NG8K @ 10.946|
This is just like saying "Natural Gas (NG) 2008 (8) May (K) at $10.946 /mmBtu (10.946)." A trader buys or sells a natural gas contract according to this type of quotation.
Depending on the quoted price, the value of a commodities contract is based on the current price of the market multiplied by the actual value of the contract itself. In this instance, the natural gas contract equals the equivalent of 10,000 mmBtu ounces multiplied by our hypothetical price of 10.946, as in:
$10.946 x 10,000 mmBtu = $109,460
Commodities are traded based on margin, and the margin changes based on market volatility and the current face value of the contract. To trade a natural gas contract on NYMEX requires a margin of $8,438, which is approximately 8% of the face value.
Calculating a Change in Price
Because commodity contracts are customized, every price movement has its own distinct value. In a natural gas contract, one tenth of a one-cent move is equal to $10. When determining NYMEX's natural gas profit and loss figures, you calculate the difference between the contract price and the exit price, and then multiply the result by $10. For example, if prices move from $10.946 to $10.846, multiply the difference, which is .100 or 10 cents, by $10 to yield a contract value change of $1,000.
|Natural Gas Contract Price (.001 cent move = $10)||$10.946||$10.846||.10 cents or $1,000|
Natural Gas Exchanges
The futures contract for natural gas is traded at the New York Mercantile Exchange (NYMEX, U.S. Futures Exchange (USFE), Intercontinental Exchange (ICE) and Multi Commodity Exchange (MCX).
Facts About Production
Natural gas is a convenient energy source that is piped directly from oil fields into our homes. Produced domestically, it is distributed to more than 60 million homes, and is considered to be a key source in generating electricity and providing energy for new homes. In 2005, the U.S. produced 18.2 trillion cubic feet of natural gas and simultaneously consumed 21.9 trillion cubic feet of natural gas, creating a net deficit of 3.7 trillion cubic feet.
Because natural gas is difficult to store unless converted to liquid natural gas, more sources of it need to be found to match demand. According to the Minerals Management Service and U.S. Geologic Survey, the U.S. has significant amounts of untapped natural gas reserves, which from an investing standpoint offers an interesting opportunity. (How a company accounts for its expenses affects how its net income and cash flow numbers are reported in Accounting For Differences In Oil And Gas Accounting.)
Factors That Influence Natural Gas Prices
The price of natural is influenced by the following factors:
- While natural gas cannot be shipped around the world in pipes (and because of the impracticality of building pipes across the ocean), liquid natural gas is gaining a foothold in the marketplace. The Gas Technology Institute (GTI) released a report showing that the cost of producing liquid natural gas has dropped by as much as 50%, virtually debunking the belief that it is too expensive to be a viable alternative. This makes the option of importing and exporting natural gas more common in a world that needs new forms of energy besides crude oil.
- Qatar is considered to be sitting on the world's largest natural gas fields, the North Field. It is estimated to be 6,000 square kilometers and is partially shared by Iran. With the potential to develop 1,180 trillion cubic feet, Qatar is emerging as the leader in natural gas, holding almost 20% of the world's natural gas within its borders.
- Continued unrest in the Middle East and the strained relationship between the U.S. and Iran jeopardizes the ability for foreign natural gas to be safely transported around the world.
- Currently, 96% of the world's natural gas reserves reside outside the U.S., with 15 nations representing 84% of the total natural gas production.
Natural gas was once considered a throw-away byproduct of oil exploration. However, it has increased in relevance and importance as the world's crude oil reserves are slowly being depleted. As more efficient and inexpensive ways of liquefying natural gas are developed, it is steadily inching its way closer to becoming a viable fuel alternative for the future.
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