Learn About Futures Insider For November 10 : Natural Gas

Natural gas is an important source of energy across the globe and - although a reasonably unassuming colorless and odorless gas in its pure form – is vital to many societies. This combustible combination of hydrocarbon gases is a unique member of the energy sector and our contract specifications refer to the NYMEX futures contract.

Contract Size: 10,000 million British thermal units (mmBtu)

Price Quote & Tick Size: U.S. dollars and cents per mmBtu.; minimum tick size $0.001 (0.1¢) per mmBtu ($10.00 per contract).

Contract Months: All months

Trading Specs: Open outcry trading is conducted from 9:00 AM until 2:30 PM. Electronic trading is conducted from 6:00 PM until 5:15 PM via the CME Globex® trading platform, Sunday through Friday. There is a 45-minute break each day between 5:15PM (current trade date) and 6:00 PM (next trade date).

Daily Price Limit: $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.

Trading Symbols: NG
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Past performance is not indicative of future results.
***chart courtesy of Gecko Software

Natural Gas Facts

Natural gas as a fossil fuel can be found in fields and coal beds across the globe. It can also be produced by chemically treating coal or from the anaerobic decay of organic materials – biogas – from swamps, marshes, landfills, and sewer. The following map shows global “proved reserves”, those which technology suggests are reasonably recoverable and can be substantiated:

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Natural gas use is not confined to modern origins - and from the flame of the Oracle of Delphi to bamboo pipelines built in ancient China, natural gas has proved a source of creative inspiration as well as valuable energy. Britain and the United States used natural gas for lights through the late eighteenth century and the first natural gas-specific well was dug in the early nineteenth century.

Unrefined natural gas is primarily composed of methane – up to 90 percent in some cases – but can also contain ethane, propane, butane, carbon dioxide, oxygen or nitrogen. Nearly pure methane is considered “dry” natural gas while the presence of hydrocarbons, as the name implies, means it is “wet”. In processing, mercaptan is added to natural gas to give it the sulfur-like odor for safety in leak detection. Gas is collected in storage tanks and added to pipelines when required.
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**Data courtesy of EIA

Natural gas can also be chilled and stored as a liquid for transport and export. This Liquid Natural Gas (LNG) is turned back into gas and added to pipelines at destination. The following chart displays the three largest natural gas producers in terms of gross production:

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**Data courtesy of EIA

The top five exporters are illustrated as follows:
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**Data courtesy of EIA
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**Data courtesy of EIA

Price highlights for this market include:

* Starting in 1960, prices for natural gas from the wellhead were regulated by the Federal Power Commission. By the late 1970s, deregulation was a hot topic in the industry. Federal price regulations for interstate sales had a ceiling of around $1.42 per thousand cubic feet in early 1977.
* In 1989 legislation passed to end price controls through 1993. At that time, news outlets reported that industry officials were predicting strong gas demand growth through the 1990s. At this point futures prices spiked above $2.00 per mmBtu.
* Hurricane Andrew caused damage that halted natural gas production in 1992, shifting what some analysts were calling a depression in gas prices. Prices that year had seen a low just above $1 per mmBtu turn into highs well above $2 per mmBtu. Prices continued to find support above that $2 level as natural gas vehicles appeared on the scene and gas led the way in alternative fuel demand.
* 1996 saw spikes in prices led partially by inflation, as well as persistent cold weather forecasts. Frigid temperatures in Texas and Louisiana were seen as a threat to production, while cold weather in other parts of the US increased consumption. At the end of 1996, prices had jumped to fresh highs closing above $4.50.
* In December of 2000, cold weather forecasts and dwindling supplies caused another sharp spike in prices, this time hitting fresh highs around $10. Shortages and power alerts would grab natural gas headlines throughout the early 2000s.
* Damage from Hurricane Katrina in August of 2005 would send gas prices soaring. When Hurricane Rita came later that season, the production issues were exacerbated and prices reached highs above $15 per mmBtu. Hurricane Ike would cause damage to Gulf production in 2008, bumping prices back towards $14 before they retreated through the end of the decade, back below $5 per mmBtu. Increased supplies, production and domestic drilling have kept prices in single digits through 2011.

Key terms for this market include:

British Thermal Unit (BTU) - the amount of energy it takes to increase the temperature of a pint of water by one degree Fahrenheit.
Liquid Natural Gas (LNG) - natural gas that is converted to liquid for easier transport. It is achieved by cooling the gas to negative 260 degrees Fahrenheit.
Henry Hub - a site where several interstate and intrastate pipelines intersect in Erath, Louisiana.

Key Uses

Natural gas can be used for gas turbines and steam turbines in electricity generation. Supplied to homes, it is used in appliances and central heating. Compressed natural gas may also be used for automobile fuel. The overall usage distribution may be illustrated as follows:

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**Data courtesy of EIA

Key Concerns

As with crude oil, weekly statistics released by the EIA can bring a fair amount of price volatility to natural gas markets. In addition to the weekly reports, the following items can also bring price fluctuations and are events and information worth noting:

Supply and Demand – The level of natural gas supply relative to overall demand can fluctuate and affect prices. Possible seasonal demand and competition on a retail level can also exert pressure on supplies particularly during colder winter months when usage for heating increases. Any event which threatens the supply or refining output - such as weather disruptions (like hurricanes) or pipeline issues - may affect prices.

Geopolitical Tensions – Pipeline or politically motivated supply disruptions from major suppliers like Russia may impact prices, and tensions in the Middle East can also bring price volatility.

Environmental Issues – The drive for cleaner burning fuels may change the supply and demand dynamic of natural gas since it may release fewer sulfur, carbon, and nitrogen emissions than other fossil fuels. It does, however, release carbon dioxide which many people believe may change the global climate.

Available Reserves – Although producers are now working at gathering natural gas from challenging or innovative sources like shale, the same concerns of finite supply which plagues crude oil affects natural gas. The following chart illustrates proved reserves in global regions:

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**Data courtesy of EIA

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