Natural gas futures often have a significant price change due to changes in supply. In the past, changes in supplying data is usually considered innocuous – natural gas markets are supposed to be well-scaled, and periodic adjustments are probably necessary for market equilibrium. But with every adjustment, there is speculation on whether or not the change will propagate through all other markets.
This article discusses how these updates can make natural gas futures volatile and how there may be an opportunity for arbitrage to take advantage of these volatility shifts by exploiting information asymmetry. Futures on natural gas are volatile as supply data fluctuates, causing market uncertainty.
Gas prices can be forecasted in advance but many analysts prefer to study historical data to predict future changes more accurately. An important factor that influences prices is the development of production and consumption of natural gas.
There are two major natural gas producers in North America:
Canada and the United States.
The United States has the largest amount of natural gas, which is the main reason why natural gas futures are highly sought after in the energy market.
In 2008, the US and Canada began a long process of comparing their data and producing natural gas.
The purpose was to come up with a common standard for reporting supply and demand data that could be used throughout the country. The process is still ongoing but they have released preliminary data in 2008 that shows a small decrease in Canadian production. As a result of this trend, there are concerns over future supply. This causes prices to drop on the futures market for North American natural gas.
In the United States, production was about 29 bcm per day in 2013 and about 31 bcm per day at the end of June 2014 but natural gas prices have declined by over 30% since then.
Brent crude oil is priced in London. Natural gas is priced in New York.
Natural gas prices are based on forecasts of what they will be tomorrow, next month, and next year. But it is impossible to predict the future with 100% accuracy. To determine what it will cost to purchase natural gas in the future requires solid reasoning based on information from experts and statistics from various sources that are accepted as reliable by traders and analysts.
Who can trade GERDA futures?
Anyone with a brokerage account can trade GERDA futures. Anyone without an account can participate in trading in their individual capacities. “An individual trading capacity” means that a person who has no account balance to deposit with a broker may buy or sell an underlying commodity contract on their own and retain the proceeds of such sale; but the holder of an account is limited to purchasing only through the specific instructions of his or her broker.”
What is a “Natural gas forward contract?”
The natural gas forward contract refers to one of the most widely traded natural gas markets in the world. The Euro Natural Gas Day-ahead (NGERDA) Futures Contract is discussed here. It is a measure of natural gas that must be delivered to the utility on a certain day of the year at a predetermined price.
What are “Futures?”
A futures contract is an agreement to buy or sell a specific quantity of an underlying commodity, at a predetermined future date, at a known price. In this case, natural gas futures contracts will be traded in specially designated exchanges under highly regulated conditions for the purpose of keeping prices as stable as possible.
Is trading in natural gas futures affected by weather?
Yes. Weather can have an effect on the price at which futures contracts are purchased. Natural gas prices are affected by weather conditions such as warm weather, cold weather, rain or wind that might impact production or consumption rates and feed those results into their trading decisions.
Are natural gas futures traded on the New York Mercantile Exchange (NYMEX)?
Yes. GERDA futures are traded in specially designated exchanges under highly regulated conditions for the purpose of keeping prices as stable as possible. There is also a market for options in the form of Euro Natural Gas (NGX) options on NGERDA futures. The price of natural gas futures is affected by a number of factors including supply, demand, global availability and political stability.