Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on May 31, 2022 at 9:22

LOL!  The good news is that my usage of natural gas is going down fast.  The furnace hasn't run in a while.

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Permalink Reply by Skip Peel - Mineral Consultant on May 31, 2022 at 9:41

Ugh!  For whose convenience?

Permalink Reply by Mister Sunday on May 31, 2022 at 9:50

Oh I'm sure its a stupid high number.  My CP bill is usually only about $32 a month, but it's worth it, as I have a gas clothes dryer, water heater, furnace and stove. keeps my NRG bill from getting too high!

Permalink Reply by full name on May 31, 2022 at 14:11

A therm is 100,000btu's.  Assuming I have all the decimals in the correct place,   1 MCF is approximately 1,000,000 BTU's (MM BTU) so it should be 10 therms per MM BTU.

BTW my gas bill and all associated charges (i.e delivery) are in CCF (hundred cubic feet) which is one therm.

Permalink Reply by Skip Peel - Mineral Consultant on June 28, 2022 at 9:22

The July monthly settlement price falls $2.357, from $8.908 to $6.551.

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Permalink Reply by OLDDOG2020 on June 28, 2022 at 13:47

6.551 is not 8.908 but it's better than July 21 3.84, July 20 1.77, July 19 2.37, July 18 2.83......I had no clue how much money I was losing when those mean tweets were flying around!

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Permalink Reply by Skip Peel - Mineral Consultant on June 28, 2022 at 13:58

We may fall below $6 mcf soon but the Futures forward strip predicts monthly prices between $4 and $5 for years into the future.  Of course that depends on companies not over producing and avoiding a recession.  Both of which could put us right back at $3 in a year.

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Permalink Reply by Skip Peel - Mineral Consultant on June 29, 2022 at 2:36

I agree but I think that a recession is the greater possibility to impact oil.  Even if the US avoids the brunt of a recession, global demand could be significantly reduced.  Of course less oil production means less associated gas which bolsters Haynesville nat gas prices.

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Permalink Reply by Skip Peel - Mineral Consultant on July 29, 2022 at 14:08

The monthly settlement price for August is $8.687.  The average monthly settlement price to date for 2022 is $6.451

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Permalink Reply by Skip Peel - Mineral Consultant on August 30, 2022 at 4:43

The monthly settlement price for September is $9.353.  The average monthly settlement price to date for 2022 is $6.773.

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Permalink Reply by Skip Peel - Mineral Consultant on September 13, 2022 at 4:13

The Process, Quirks and Idiosyncrasies of U.S. Natural Gas Pricing

Monday, 09/12/2022  Published by: Sheetal Nasta  rbnenergy.com

The U.S. natural gas market is one of the most transparent, liquid and efficient commodity markets in the world. Physical trading is anchored by hundreds of thousands of miles of gathering, transmission and distribution pipelines, and well over 100 distinct trading locations across North America. The dynamic physical market is matched by the equally vigorous CME/NYMEX Henry Hub natural gas futures market. Then, there are the forward basis markets — futures contracts for regional physical gas hubs. These pricing mechanisms play related but distinct roles in the U.S. gas market, based on when and how they are traded, their respective settlement or delivery periods, and how they are used by market participants. In today’s RBN blog, we continue a series on natural gas pricing mechanisms, this time with a focus on the futures and forwards markets.

In Part 1, we took a trip in the way-back machine to see how these pricing systems — including the processes for price discovery and transparency — even came to be in the U.S. We recounted the shift of physical gas trading from a primitive market with long-term deals done only between producers and pipeline owners at regulated prices to a burgeoning spot market with no price controls and “open access” on pipelines for others besides pipeline owners. That era of decontrol and restructuring of the pipeline industry was followed by a period of minimal regulatory oversight in which independent publishers — price reporting agencies (PRAs) — took on the role of carrying out price discovery and dissemination. That is, until the Enron debacle in the early 2000s, which forced a hard look at manipulation issues that influenced published price indices and brought the Federal Energy Regulatory Commission (FERC) back into the fold.

Specifically, FERC put in place strict price-reporting and ethical guidelines for those companies that chose to report trades to PRAs. Additionally, market participants who buy or sell an annual minimum of 2.2 trillion British thermal units (TBtu) in the physical day-ahead or month-ahead market — i.e., the kind of transactions that either impact or are impacted by PRA indices — also were required to submit Form 552 each year, reporting all purchases and sales of gas by quantity and type of pricing mechanism. That resulted in the robust Form 552 dataset, including volumes for fixed-price deals (negotiated prices between counterparties) and index-price deals (transactions based on a PRA-published index) for next-day and next-month delivery.

PRAs and published price indices remain a mainstay in the role of transaction reporting and price discovery, and in recent decades, electronic trading platform Intercontinental Exchange (ICE) has also become ensconced in the gas market, providing a real-time mechanism for physical and financial transactions, which are then summarized in an end-of-day report and incorporated into the PRA price indices.

In Part 2, we took a closer look at the pricing instruments for trading physical gas at the more than 100 distinct trading locations across North America. We focused on the three most common markets: (a) the daily physical spot market in which natural gas is bought and sold for delivery the next day, (b) the monthly spot market where gas is sold on monthly contracts for the upcoming month during a period called bidweek, and (c) long-term contracts where gas supply is contracted under seasonal, annual or multi-year deals.

Next, we turn our focus to the primary financial, forward-looking pricing instruments, starting with the terminology. Trading for the prompt month or more than one month into the future also occurs in the “forwards” or “futures” market. In the North American natural gas market, the term “futures” is usually reserved for the standardized CME/NYMEX contract at the Henry Hub in Louisiana, the benchmark location for the North American gas market, while the term “forwards” usually refers to over-the-counter (OTC) deals done for gas in the other price locations. (Technically, any price for a delivery date in the future is a forward.)

Both the futures and forward contracts are traded daily and reflect the value of gas in today’s trading activity for deliveries at a future time at a specific location. They serve as specialized forms of “insurance” that allow market participants to manage their exposure to price risk. These transactions are usually financial in nature, involving a promise to pay or receive a fixed price for gas delivered during a specific month in the future at the given location. The price of gas being bought and sold represents today’s value for delivery in future months (i.e., it’s not a forecast, but a traded value based on today’s market sentiment about the value of deliveries in the future at that location, meaning it is only as prescient as the opinions of the parties executing it). Futures and forwards contracts are for ratable delivery each day of a specified period of time in the future, with the most common packages being a month or a series of consecutive months — called a “strip” — for a season, a quarter or full calendar year.

Gas Futures

Futures markets in their present form — on organized exchanges — have been around for 170 years starting with the Chicago Board of Trade (CBOT) in 1848. Futures exchanges offer specific contracts for trading, the focus of today’s blog being the first standardized futures contract for natural gas: Henry Hub Natural Gas Futures. Henry Hub gas futures were first listed in April 1990 on the New York Mercantile Exchange (NYMEX) and are now traded on the Chicago Mercantile Exchange (CME) after the CME acquired the NYMEX in 2008. Henry Hub futures contracts are listed for as many as 155 delivery months into the future (current year plus 12 years forward).

Futures market participants buy and sell these standardized, monthly “paper” contracts in lots of 10,000 million British thermal units (MMBtu) on CME, which provides a daily settlement for each month that’s listed based on the last two minutes of trading between 2:28 and 2:30 pm Eastern Time. Monthly contracts expire on the third-to-last business day of the month prior to the delivery month.

The settlement method at expiration is physical delivery to the Henry Hub pricing location in southeastern Louisiana, making it the national benchmark for natural gas markets (see Henry Hub I Am, I Am for the intriguing backstory of how Henry Hub was established as the delivery mechanism for gas futures contracts). The bulk of these NYMEX contracts (98%) are offset by a matching buy or sell transaction in the futures market that is executed before the delivery period occurs. As a result, these contracts do not end with the delivery of physical gas. A small percentage, however, is held by participants until the delivery date (i.e., “held to expiry”), meaning the contract holder must deliver or receive physical natural gas at Henry Hub. For that reason, the contract has to have a physical delivery mechanism, namely the necessary pipeline capacity to deliver the volumes, in this case the pipeline infrastructure of Henry Hub, which is physically located in Erath, LA. This delivery mechanism represents a critical link between the futures contract and the physical spot market and generally prevents the two from diverging.

Gas Forwards

Forward contracts are similar to futures contracts because they are both agreements to buy or sell natural gas at a specific price at a date in the future and represent the present value for future delivery. However, unlike futures transactions, which are on-exchange and regulated by the CFTC, forward contracts are bilateral, over-the-counter and off-exchange transactions, for the most part conducted via a third-party voice broker or on ICE and not regulated by the CFTC (except with respect to the CFTC’s market manipulation jurisdiction). Since they are done privately between counterparties, they must be “cleared” or settled through a third party. That used to be done by the NYMEX, but the role has shifted to ICE.

Also, unlike futures, forward contracts are non-standardized, meaning the quantity, delivery period, and delivery point can be irregular and customized, though the deals commonly occur at one of the dozens of trading hubs around the country — other than Henry Hub. Like with futures, more than one sequential month can be strung together and bought or sold as one contract, or strip. The summer strip in the gas market is defined as April through October, while a winter strip is November through March.

Price reporting firms, brokers and exchanges such as ICE provide daily forwards settlement values for many price locations based on daily trading activity, reported trades or outstanding forward commitments for each month in the future as far out as trading liquidity allows. (Liquidity generally diminishes the further into the future you go.) The final settlement of forwards contracts occurs at the end of each delivery month and most are settled against Platts Inside FERC’s (IFERC) Monthly Index, a physical monthly index published by S&P Global (the prices resulting from the bidweek trading we discussed in Part 2). If the published IFERC index price is lower than the forwards contract value, the buyer pays the seller the difference. If the IFERC index posts at a higher price than the forward contract value, the seller pays the buyer the difference.

Locational forward prices can be transacted in absolute terms, but more typically forward contracts are traded (and reported) as a positive or negative differential, or “basis,” to the corresponding Henry Hub futures contract price. Because forward contracts settle against a floating monthly published index price, they are also referred to as “basis swaps,” meaning they are swapping one price for another at the time of contract settlement. When you string together the daily settlement prices for all monthly forward delivery contracts for a particular hub, you get the “forward curve” for that location.

Forward basis is theoretically reflective of the cost to move the gas from a given regional hub to Henry Hub (locational basis), as well as the longer-term supply-demand dynamics at the regional hub relative to the national benchmark. However, like futures, basis does not remain constant over time. It can change daily in small increments in response to daily movements in the Henry Hub price — all other things being equal at the local hub, basis will adjust for the move in the futures market in order to keep the implied full price at the local hub about the same. For example, we saw this basis adjustment happen in the first week of September — as October Henry Hub futures retreated $1.35/MMBtu, EGS October basis contracted (i.e., strengthened) by about 18 cents to negative $1.445/MMBtu, which means the EGS implied full price for October still fell but not quite as much as Henry Hub. Basis can also move due to major fundamental changes affecting the long-term fundamentals at the hub, including supply, demand and pipeline flows. It can also experience a level shift over time due to bigger changes in fundamentals at the price location. Thus, the forward curve on any given day is merely a snapshot of the market’s expectation of prices for deliveries on that future day.

As we noted in Part 2 of this series, while spot markets react daily to changes in immediate or next-day fundamentals, futures and forwards can also move daily but are more influenced by changes to long-term fundamentals that will affect future deliveries. This includes pricing in any new information that affects future supply, demand, storage fill, midstream capacity and market sentiment. And to the extent that these things are not priced in, forward curves can also be wrong. In the case of EGS, we saw earlier this year how the delay of Mountain Valley Pipeline (MVP) project weighed on basis — the project would have provided a much-needed outlet for producers who are increasingly constrained by takeaway pipeline capacity. Of course, one of the biggest fundamental drivers of the gas market is weather and its effect on demand. However, since long-term weather forecasts are not reliable or even available for months or years in the future, forward-basis values assume historically “normal” weather patterns and seasonality. This is what makes natural gas futures or forward curves considerably smoother than historical price curves, which are driven by actual, real-time fluctuations in weather and other factors. It is also what gives futures/forward curves their characteristic saw-tooth pattern, peaking in the winter when demand is highest and troughing in the summer and shoulder months when demand is lower, despite that pattern being indistinguishable when looking at historical prices.

In terms of the role of forwards in the market, tying all locations to a common denominator — in this case Henry Hub — allows the market to evaluate the relative strength or weakness of prices at any hub versus any other hub. From a hedging perspective, forward contracts can be utilized along with the NYMEX Henry Hub futures contract traded for the same period to hedge outright price risk at regional trading locations (CME/NYMEX Henry Hub futures + locational basis = implied absolute price at the regional hub).

That completes our overview of the main pricing instruments in the U.S. gas market. Combined, the physical spot and financial futures and forward basis markets — and their corresponding exchanges and price discovery and reporting systems — make the U.S. gas market one of the most liquid and transparent in the world. The system is not without its flaws, however. For example, as we have discussed previously (see Price Tag!), there are fewer and fewer fixed-price (non-index based) deals being done to include in calculating PRA index prices, raising questions about just how representative of the market the PRA indices really are. We’ll provide an update on that topic in a future blog.

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Permalink Reply by Skip Peel - Mineral Consultant on September 29, 2022 at 3:12

The monthly settlement price for October is $6.868. The average monthly settlement price to date for 2022 is $6.783.

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