The natural gas futures market is where contracts for future delivery of natural gas are traded.
These contracts specify a set volume of natural gas to be delivered at a future date for a predetermined price.
Trading mostly happens on the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE).
This market helps participants manage price volatility by locking in prices today for future transactions. While some contracts result in physical delivery of natural gas, most are settled financially.
Reasons for trading Natural Gas futures contracts
Natural gas futures trading began in 1990 to help producers, consumers, and traders manage price risks.
Producers sell futures contracts to secure prices for future sales, ensuring revenue stability.
Consumers buy futures contracts to lock in prices for future needs, protecting against potential price increases.
Financial traders, who don’t need the physical gas, trade futures to diversify portfolios and gain exposure to the commodity market.
Pricing dynamics in the futures market
Front-Month Contracts: Contracts for the month immediately following the current one. For instance, in August 2024, the front-month contract is for September 2024.
Contango: When future prices are higher than current prices, indicating expectations of higher future demand or storage costs.
Backwardation: When future prices are lower than current prices, suggesting higher current demand or tighter supply.
Natural gas prices are affected by:
Supply Factors: Domestic production and imports.
Demand Factors: Temperature variations, economic activity, exports, other fuel prices, and storage volumes.
Storage acts as a buffer, balancing supply and demand. When current prices are unusually high or low, the futures curve becomes steeper.
Current State of the Natural Gas Futures Market
As of now, the market is in contango, with prices expected to rise significantly in the coming winters (Dec 2024–Mar 2025 and beyond).
This reflects anticipated higher demand and slower production growth, influenced by new liquefied natural gas terminals coming online, with information from EIA.
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