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Natural Gas Futures Market. James Todaro February 2001 Bangladesh Ministry of Energy and Mineral Resources. [email protected]. Presentation Objectives what is. Futures Market/Contract Market Term(s) Pricing pattern(s) Whose in Natural Gas Futures Market Difference from Spot Market - PowerPoint PPT Presentation
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Natural Gas Futures Market
James TodaroFebruary 2001
Bangladesh Ministry of Energy and Mineral Resources
2
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
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 future 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
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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
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
Do
lla
rs
pe
r M
MB
tu
1998
1999
2000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
9
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
10
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
11
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
13
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...
21
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
22
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
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 “inverted market”).
Backwardation Pricing Series
0
1.5
3
4.5
6
Jan Feb Mar Apr MayD
olla
rs p
er M
MB
tu
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.
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
25
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
26
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?
27
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.
28
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
29
Other Energy Futures Markets
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Where are they located*?
*Markets Found on the Internet
31
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•Propane•Heavy Crude Oil•Electricity
33
Energy Products Traded IPE Brent Crude Oil Gasoil Unleaded
Gasoline Natural Gas
SGX-DT Crude Oil
SFE Electricity
34
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)
35
Natural Gas Futures Market Recap: Futures Market Requirements Market terminology Market participants Trading strategy - hedging Price connection w/spot (physical Mkt.) World Markets