Candlestick Trading Blog

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Natural gas use makes up almost twenty-five percent of the United States’ energy consumption. Because of the sheer size of the demand for natural gas, it is only reasonable that trading commodities in natural gas futures would be an attractive investment. The US futures market for natural gas has become an important part of futures investing with trading being done primarily at the New York Mercantile Exchange and the Chicago Mercantile Exchange.

Geography of Natural Gas Contracts
Located in New York City, the NYMEX has a natural gas futures contract that is generally considered a national benchmark price. The contract size is 10,000 million British thermal units (mmBtu) and the price for this contract is based on delivery at the Henry Hub in Louisiana. This is the central location for 16 intrastate and interstate natural gas pipeline systems that tap the Gulf regions massive natural gas deposits. Gas from this area provides resources for the East coast, the Gulf coast, the Midwest and up to the Canadian border. Commodity trading in natural gas futures is dependant on this important central hub.

In addition to the offerings of the NYMEX, two natural gas futures contracts are available for futures trading at the Chicago Mercantile Exchange. The HH and HP contracts reflect different delivery options; the HH contract settles on the same date as the physically-delivered natural gas contract and HP is a penultimate contract. Both contracts are listed for 72 months.

Contract Risk Management
There is a direct relationship between natural gas futures and electricity futures, commonly referred to as the spark spread. This relationship can be used to manage price risk in the power market sector.  In addition, options contracts and calendar spread options contracts provide additional risk management opportunities. 

Alternative Contract Opportunities
Because of the incredible amount of price volatility in natural gas futures, a basis market has developed concerning the pricing relationships of the Henry Hub and other key natural gas markets in the United States and Canada. Because of this, the NYMEX offers a group of basis swap futures commodity contracts. these contracts are quoted as price differentials be the HH and other natural gas pricing points. The basis contract size is 2.500 mmBtu and can be purchased via online futures trading. There is also a mini contract that can be purchase for regular futures trading with a contract size of 2,500 mmBtu.

The Chicago Mercantile Exchange also offers futures option contracts. These natural gas futures contracts can be obtained through the CME’s Globex system in a similar fashion to the NYMEX deals. Because of the incredible advances in Internet security and the extensive risk management plans of the futures exchanges, these online transactions are safe and offer trading to a new group of investors who have never been involved in trading natural gas futures or any other futures trading.