Understanding the Natural Gas Commodity Market Transparent natural gas commodity market reflects supply and demand; effect of shale gas
The transparent natural gas commodity There are two distinct markets for natural gas: the physical market market provides a clear view of the and the financial market. They are separate but linked. stabilizing effect of shale gas. The chart below tracks price changes in the commodity Financial Market: In addition to Physical Market: Natural gas is bought futures market for six different commodities, physical transactions, natural gas is and sold for physical delivery the next including natural gas. The chart chronicles the traded for future delivery between day at different hub locations around transformation of U.S. natural gas supply that one and 36 months from the present. the U.S. These transactions take place began in 2008, the year that natural gas These “futures” contracts are traded on on the “spot market,” sometimes also regulated futures exchanges and are called the daily market or the cash produced from abundant shale formations used by both buyers and sellers as market. In addition, natural gas is com- first arrived on the market in large volumes. risk management tools to manage monly bought and sold for physical As supply has grown, natural gas prices in exposure to potential changes in the delivery in monthly packages. The future price of the commodity. daily and monthly natural gas markets both the physical and the financial markets consist of thousands of participants Natural gas futures contracts may oc- have steadied and dropped. In comparison, making transactions at numerous casionally involve the actual physical the other commodities that are traded on the locations, with many of those transac- delivery of natural gas, but more fre- tions negotiated at a fixed-price and futures market continue to show significant quently futures contracts are traded for reported to natural gas price publish- upward and downward price swings. a different contract or the obligation is ers. Using these reported transactions, settled through a cash payment. As the The U.S. natural gas market offers an price publishers are able to calculate date of the futures contract gets closer, a benchmark “index” price for natural exceptional amount of timely and widely the financial and physical markets gas at a specific location. This system available information about physical and converge. To facilitate convergence, the of index price discovery in the physical financial transactions and underlying market futures exchanges have rules that market is unique to the U.S. natural gas govern contract trading, including fundamentals. This transparency strengthens market and contributes substantially to rules surrounding trading around the competition and provides natural gas market its unparalleled market transparency. time of settlement. participants with more facts than any other (Albrecht, Price Transparency in the U.S. commodity market, contributing to informed Natural Gas Market) decisions that benefit consumers.
Comparison of Commodities Shows Stability of Natural Gas Changes in CME monthy settlement prices Jan 2007–Present 300%
250%
200%
150%
100% Gold
50%
Coal Soybeans SilvSil er 0% Copper Wheat Corn Crude Oil -50% Natural Gas -100%
07 08 09 10 11 12 13 14 15 16 y 17 Jan 07 Jul Jan 08 Jul Jan 09 Jul Jan 10 Jul Jan 11 Jul Jan 12 Jul Jan 13 Jul Jan 14 Jul Jan 15 Jul Jan 16 Jul Jan 17Ma NGSA 2017
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