NG 2 - FINC 782 Energy Markets Portfolio Analysis AB...

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Natural Gas Risk Management Fall 2007 FINC 782: Energy Markets Portfolio Analysis AB Freeman School of Business, Tulane University, New Orleans, Fall 2007 Leslie McNew Email at [email protected] 865-5036
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Natural Gas Measurement British Thermal Units (BTUs)- how natural gas is measured and units sold BTU- heat required to raise the temperature of one pound of water one degree Fahrenheit. Examples: Ten burning kitchen matches release 10 Btu A Candy bar has about 1000 Btu One cubic foot of natural gas has about 1031 Btu A box 10x10x10 would hold one thousand cubic feet of natural gas
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Natural Gas Historical Spot Prices
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Natural Gas Physical Pricing – Period Pricing Physical Trading: Intra-month (contracts within the same month) Short-term (one month to one year) Long-term (12 months to 20 years) Spot Market Firm (definite except for force majeure) Interruptible (almost no obligation-open to renegotiation at any time) Base Load (mix of the 2 above—usually only when prices move significantly one way or another can participants change contract) Most gas is traded on a 30 day basis (calendar month)
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Natural Gas Physical Pricing – Hedging Objectives Goals Pricing Strategy Guaranteed Price Fixed Pricing Market Sensitive Price Index Pricing Price Stability Cap Pricing
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Fixed Pricing Deals-Guaranteed Pricing Industrial Client Buys gas at Socal for Dec Producer sells gas at Socal for Dec Pay Gas at $3.80 plus transport Supply gas at Socal Number of Days in Month Sep 30 Oct 31 Nov 30 Dec 31 Jan 31 Sept Firm Physical Sale: Daily volume x price x # days in month to flow 10,000 x $4.90 x 30 days = $1.47 M
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Fixed Pricing Deals-Guaranteed Pricing Natural Gas Physical Pricing Example with Transport Physical Gas Deal: Buy 10,000 MMBtu per day for December Flow gas from Sanwan to Socal for December Set Deal in November Transport Transport Transport and Fuel Charge Total Amount Current Transport and Fuel Charge Total Amount Days Amount Price Paid and Fuel Charge per MMBtu Paid per Day Market Price and Fuel Cha per MMBtu Paid per Day 1 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 2 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 3 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 4 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 5 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 6 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 7 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 8 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 9 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 10 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 11 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 12 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 13 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 14 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 15 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 16 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 17 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 18 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 19 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 20 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 21 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 22 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 23 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 24 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 25 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 26 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 27 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 28 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 29 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 30 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 31 10,000.00 $3.80 $0.10 $1,000.00 $37,000.00 $4.40 $0.10 $1,000.00 $43,000.00 Total Amount Paid for Month $1,147,000.00 $1,333,000.00 Mark to Market Value $186,000.00 Industrial Client Buys gas at Socal for Dec Producer sells gas at Socal for Dec Pay Gas at $3.80 plus transport Supply gas at Socal
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NYMEX Henry Hub Natural Gas Futures NYMEX launch in 1990: natural gas futures contract Provided standardized hedging vehicle/true price transparency Trading Unit: 10,000 million British Thermal Units (mmBtu)
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  • Spring '08
  • McNew
  • Futures exchange, Gas Daily

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