Natural Gas Futures Options Trading News

Natural Gas Futures

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Natural Gas Futures and Options

  • Energy Products Brochure for Active Individual Traders
  • Henry Hub Natural Gas (NG) Futures

 

Natural gas produces almost a quarter of the United States energy consumption. Natural gas is used to provide energy for homes, commercial buildings and utility plants.

The natural gas futures contract on the New York Mercantile Exchange consists of 10,000 million British thermal units (mmBtu). A Btu refers to the amount of natural gas required to heat one pound of water by one degree at normal pressure. There are about 1,027 Btu in one cubic foot of natural gas.

Natural gas is transported by pipelines throughout the country.

Introduction to Natural Gas

Course Overview

The structure of the natural gas market has evolved over time and become one of the most competitive, efficient, transparent, and liquid natural gas futures and options market in the world. Explore the basics of natural gas infrastructure, key impacts like seasonality that affect supply and demand, as well as hedging physical product using futures and options products.

Introduction to Natural Gas

Understanding Supply and Demand: Natural Gas

Natural gas production in the United States has been rising steadily since 2011. Over 90% of the increase in domestic natural gas production has happened in the seven most prolific shale formation regions, with the largest increases coming from Marcellus. While the states within those shale regions produce the highest volumes of natural gas, there is a broad area of production across the majority of the United States.

Gas storage levels also plays a key role when looking at supply side. Natural gas in storage provides a valuable cushion to meet peak demand. During periods of lower demand, surplus can be injected into storage facilities. The natural gas storage infrastructure can be utilized to accommodate sudden rises or falls in demand, up to a certain point.

Overall, natural gas supply is characterized as being quite responsive to a relatively wide range of prices. However, restrictions of the existing infrastructure impact additional flows, rendering the supply curve very inelastic even when prices are high. On the demand side, overall economic growth, weather and competing fuel prices affect gas demand. Here is a general breakdown of the demand of natural gas across the some of the main sectors.

Demand of Natural Gas

When it comes to electrical power generation, natural gas power burn has been increasing due to low gas prices relative to coal. The second largest sector is within industrial usage. Natural gas is used as raw material to produce fertilizer, chemicals, and hydrogen.

Residential and commercial sector utilize gas as a fuel for heating or cooling purposes. Natural gas suppliers are usually insulated from short-term fluctuations through existing tariffs. The transportation sector accounts for a small amount of natural gas used as vehicle fuel from liquefied natural gas or LNG.

Over the last few years, the United States has seen the development of new LNG exporting terminals, mostly in the gulf coast region. The demand for natural gas for LNG export to international markets is expected to rise significantly.

Natural Gas and Weather

Gas demand has a high price-sensitivity to changes in weather. Weather pattern changes are the primary contributor to gas price volatility. Gas prices also show a clear seasonal pattern with higher prices in fall and winter months in response to higher demand for heating. And lower prices the spring and summer months as demand drops.

Natural Gas - Supply:

The largest producers are of natural gas in the United States are Texas, Federal offshore Gulf of Mexico, Oklahoma, New Mexico, Wyoming and Louisiana; respectively.

Russia and the United States account for about 42 percent of the world production of natural gas. Russia produces about 22 trillion cubic feet(tcf) and the U.S. produces about 19 tcf.

Natural Gas - Demand:

The United States consumes about 25% of worldwide consumption.

The U.S. consumes all of the natural gas it produces and imports the remainder mostly from Canada.

The heaviest demand for natural gas is during the winter months. Colder than normal winters can increase demand for natural gas. Summers are usually the lowest demand periods for natural gas. Extremely hot periods during the summer can spike demand for natural gas.

About 25% of natural gas consumption goes to residences, 16% to commercial, 24% to commercial utility plants and 35% to industrial establishments.

Trading Natural Gas Futures:

  • Natural gas is one of the more volatile commodities markets. This is evident in the high volatility premiums that natural gas options have.
  • Natural gas futures will react quickly to any tropical storms that move into the Gulf of Mexico. Most of the natural gas operations are in and along the Gulf and they are susceptible to damage and production losses. Hurricane Katrina is a prime example where natural gas prices rose to all-time highs due to the destruction.
  • Natural gas futures are very dependant on the weather - mainly in the winter. Prices can spike quickly when extreme cold weather hits.

The contract:Henry Hub Natural Gas Is widely used as a national benchmark price for natural gas, which accounts for almost a quarter of United States energy Reflects a vigorous basis market based on the pricing relationships between Henry Hub and other important natural gas market centers in the continental United States and Canada Is the second-highest volume futures contract in the world based on a physical commodity

Natural Gas Futures: Things to know:

The price is based on delivery at the Henry Hub in Louisiana, the nexus of 16 intra and interstate natural gas pipeline systems that draw supplies from the region's prolific gas deposits. The pipelines serve markets throughout the U.S. East Coast, the Gulf Coast, the Midwest, and up to the Canadian border. Traded via open outcry, electronically on CME Globex, and off-exchange for clearing only as an EFS, EFP or block trade through CME ClearPort Trading at settlement is available for the front three months, subject to the existing TAS rules of the underlying respective physical products.

Option types: American, calendar spread, European, daily

Natural Gas Futures Contract Specs

Henry Hub Natural Gas Futures

Symbol  NG

Venue    CME ClearPort, CME Globex, Open Outcry (New York)

Hours
(All Times are New York Time/ET)

CME Globex:    Sunday - Friday 6:00 p.m. - 5:15 p.m. New York time/ET (5:00 p.m. - 4:15 p.m. Chicago Time/CT) with a 45-minute break each day beginning at 5:15 p.m. (4:15 p.m. CT)

CME ClearPort:    Sunday - Friday 6:00 p.m. - 5:15 p.m. New York time/ET (5:00 p.m. - 4:15 p.m. Chicago Time/CT) with a 45-minute break each day beginning at 5:15 p.m. (4:15 p.m. CT)

Contract Unit    10,000 million British thermal units (mmBtu).

Pricing Quotation    U.S. dollars and cents per mmBtu.

Minimum Price Increment    $0.001 (0.1¢) per mmBtu ($10.00 per contract).

Maximum Daily Price Fluctuation    $3.00 per mmBtu ($30,000 per contract) for all months. 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 $3.00 per mmBtu in either direction. If another halt were triggered, the market would continue to be expanded by $3.00 per mmBtu in either direction after each successive five-minute trading halt. There will be no maximum price fluctuation limits during any one trading session.

Termination of Trading    Trading of any delivery month shall cease three (3) business days prior to the first day of the delivery month. In the event that the official Exchange holiday schedule changes subsequent to the listing of a Natural Gas futures, the originally listed expiration date shall remain in effect. In the event that the originally listed expiration day is declared a holiday, expiration will move to the business day immediately prior.

Listed Contracts    The current year plus the next twelve years. A new calendar year will be added following the termination of trading in the December contract of the current year. On CME Globex: The current year plus the next eight years.

Trading at Settlement (TAS)    Trading at settlement is available for spot (except on the last trading day), 2nd and 3rd months and subject to the existing TAS rules. Trading in all TAS products will cease daily at 2:30 PM Eastern Time. The TAS products will trade-off of a "Base Price" of 0 to create a differential (plus or minus 10 ticks) versus settlement in the underlying product on a 1 to 1 basis. A trade done at the Base Price of 0 will correspond to a "traditional" TAS trade which will clear exactly at the final settlement price of the day.

Settlement Type    Physical

Grade and Quality Specifications    Natural Gas meeting the specifications set forth in the FERC-approved tariff of Sabine Pipe Line Company as then in effect at the time of delivery shall be deliverable in satisfaction of futures contract delivery obligations.

Position Limits    NYMEX Position Limits

Rulebook Chapter    220

Exchange Rule    These contracts are listed with, and subject to, the rules and regulations of NYMEX.

Natural Gas Futures Options

Underlying Futures    Henry Hub Natural Gas Futures (NG)

Product Symbol    ON

Venue    CME Group ClearPort, Open Outcry (New York)

Hours
(All Times are New York Time/ET)

CME ClearPort:    Sunday – Friday 6:00 p.m. – 5:15 p.m. (5:00 p.m. – 4:15 p.m. Chicago Time/CT) with a 45-minute break each day beginning at 5:15 p.m. (4:15 p.m. CT)

CME Globex    Sunday – Friday 6:00 p.m. – 5:15 p.m. (5:00 p.m. – 4:15 p.m. Chicago Time/CT) with a 45-minute break each day beginning at 5:15 p.m. (4:15 p.m. CT)

Contract Unit    A Henry Hub Natural Gas Put (Call) Option traded on the Exchange represents an option to assume a short (long) position in the underlying Henry Hub Natural Gas Futures traded on the Exchange.

Price Quotation    U.S. dollars and cents per mmBtu

Option Style    American

Minimum Fluctuation    $0.001 per MMBtu

Expiration of Trading    Trading ends at the close of business on the business day immediately preceding the expiration of the underlying futures contract.

Listed Contracts    Consecutive months for the balance of the current year plus 5 additional years.

Strike Prices    Twenty strike prices in increments of $0.05 per mmBtu above and below the at-the-money strike price in all months, plus an additional 20 strike prices in increments of $0.05 per mmBtu above the at-the-money price will be offered in the first three nearby months, and the next 10 strike prices in increments of $0.25 per mmBtu above the highest and below the lowest existing strike prices in all months for a total of at least 81 strike prices in the first three nearby months and a total of at least 61 strike prices for four months and beyond. The at-the-money strike price is nearest to the previous day's close of the underlying futures contract. Strike price boundaries are adjusted according to futures price movements.

Settlement Type    Physical

Position Limits    NYMEX Position Limits

Rulebook Chapter    370

Exchange Rule    These contracts are listed with, and subject to, the rules and regulations of NYMEX.


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