Trading Natural Gas Futures

Natural gas futures are traded on the New York Mercantile Exchange. This is the largest natural gas futures market in the world. Below are the contract specs for natural gas futures.

Trading Unit10,000 million British thermal units (mmBtu).Price QuotationU.S. dollars and cents per mmBtu.Trading Hours (All times are New York time)Open outcry trading is conducted from 10:00 AM until 2:30 PM.After hours futures trading is conducted via the CME Globex trading platform, with the following schedule:Sunday 6:00 PM until 9:50 AM the following day (Monday’s trade date)Monday  Thursday 3:15 PM until 5:15 PM the same day (Current trade date)6:00 PM until 9:50 AM the following day (Next trade date)Friday 3:15 PM until 5:15 PM (Friday’s trade date)Trading Months72 consecutive months commencing with the next calendar month (for example, on January 6, 2004, trading occurs in all months from February 2004 through January 2010).Minimum Price Fluctuation$0.001 (0.1) per mmBtu ($10.00 per contract).Maximum Daily Price Fluctuation$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.Last Trading DayTrading terminates three business days prior to the first calendar day of the delivery month.Settlement TypePhysical.DeliveryThe Sabine Pipe Line Co. Henry Hub in Louisiana. Seller is responsible for the movement of the gas through the Hub; the buyer, from the Hub. The Hub fee will be paid by seller.Delivery PeriodDelivery shall take place no earlier than the first calendar day of the delivery month and shall be completed no later than the last calendar day of the delivery month. All deliveries shall be made at as uniform as possible an hourly and daily rate of flow over the course of the delivery month.Alternate Delivery Procedure (ADP)An alternate delivery procedure is available to buyers and sellers who have been matched by the Exchange subsequent to the termination of trading in the spot month contract. If buyer and seller agree to consummate delivery under terms different from those prescribed in the contract specifications, they may proceed on that basis after submitting a notice of their intention to the Exchange.Exchange of Futures for Physicals (EFP) or Swaps (EFS)The commercial buyer or seller may exchange a futures position for a physical position or a swaps position of equal quantity by submitting a notice to the Exchange. EFPs and EFSs may be used to either initiate or liquidate a futures position.Grade and Quality SpecificationsPipeline specifications in effect at time of delivery.Position Accountability Levels and LimitsAny one month/all months: 12,000 net futures, but not to exceed 1,000 in the last three days of trading in the spot month.Margin RequirementsMargins are required for open futures positions.

Trading SymbolNG

Source: New York Mercantile Exchange, Inc

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Natural gas accounts for almost a quarter of United States energy consumption, and the NYMEX Division natural gas futures contract is widely used as a national benchmark price. The futures contract trades in units of 10,000 million British thermal units (mmBtu). The price is based on delivery at the Henry Hub in Louisiana, the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region’s prolific gas deposits. The pipelines serve markets throughout the U.S. East Coast, the Gulf Coast, the Midwest, and up to the Canadian border. An options contract and calendar spread options contracts provide additional risk management opportunities.

The spread between natural gas futures and electricity futures  the spark spread  can be used to manage price risk in the power markets.Because of the volatility of natural gas prices, a vigorous basis market has developed in the pricing relationships between Henry Hub and other important natural gas market centers in the continental United States and Canada. The Exchange makes available for trading a series of basis swap futures contracts that are quoted as price differentials between approximately 30 natural gas pricing points and Henry Hub. The basis contracts trade in units of 2,500 mmBtu on the NYMEX ClearPortsm trading platform. Transactions can also be consummated off-Exchange and submitted to the Exchange for clearing via the NYMEX ClearPortsm clearing website as an exchange of futures for physicals or exchange of futures for swaps transaction.The e-miNYsm natural gas futures contract, designed for investment portfolios, is the equivalent of 5,000 mmBtu of natural gas, 50% of the size of a standard futures contract. The contract is available for trading on the Chicago Mercantile Exchange (CME) GLOBEX electronic trading platform and clears through the New York Mercantile Exchange clearinghouse.

Source New York Mercantile Exchange, Inc.

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Natural gas prices seem to make the news every few months. You will hear about it during hurricane season, and you saw how Hurricane Katrina affected natural gas prices. You will also read about natural gas when temperature spikes. Whether it’s because of soaring hot temperatures, which means electric companies need to buy more natural gas to generate electricity, or it may be because of a cold snap so consumers are using more natural gas to keep warm.

When these events take place, you will see natural gas prices move quite a bit. An investor or speculator might want to trade this market. There are several ways to trade natural gas. One way would be to trade natural gas futures on the New York Mercantile Exchange. Natural gas futures trading can be very risky. You only have to put up 5% margin in order to trade it. This gives you tremendous leverage, but remember, leverage cuts both ways. If you put up 5% margin and the price of natural gas increases 5%, you’ve doubled your money. On the other hand, if prices decrease 5%, you’ve just been wiped out. Natural gas futures trading can be profitable, but it will take nerves of steel and dedication to following this market.

Another way to trade natural gas would be buying stock in individual natural gas companies. In this case you may be putting all of your money in one basket if you select just 1 or 2 stocks. This will take plenty or research on your part to find the right companies to invest in. Do you want to invest in natural gas exploration and drillers, or do you want to invest in natural gas pipeline owners? Do you only want to invest in natural gas stocks that pay a dividend? These are choices you have to make before investing.

This brings us to natural gas ETFs. ETF stands for exchange traded fund. ETFs have become very popular over the last several years. Not only can you trade a natural gas ETF, but you can find ETFs for other physical commodities too.

You can find a natural gas ETF like the United States Natural Gas Fund, LP, ticker symbol UNG which only trades natural gas futures (more on that later). The UNG fund is very focused and specific on what is in the fund. An example of a fund that will have many stocks and component to it is the SPDR S&P Oil& Gas Exploration & Production Fund, ticker symbol XOP. This energy ETF will invest in the index of stocks of companies that are involved in the production and exploration of natural gas.

Now you may ask yourself why not just invest in a natural gas mutual fund? You certainly can, and there are good ones out there, but you will need to consider a few things before investing.

With mutual funds, you will need to know what stocks are in that fund. Is that mutual fund focused on a specific sector of natural gas, or is it a catch all for anything natural gas related?

What about the expense ratio of a natural gas mutual fund? This is something most investors overlook when buying into a fund. There are some funds that charge over 1% to be in their funds. That can be an enormous drag on your performance. Is there a minimum time to hold that mutual fund? Some mutual fund companies will place restrictions on how often you can move in and out of the fund, while other will charge you a fee if you redeem it in 30 or 60 after first buying into it. They do this to stop investors from day trading the mutual fund, but what if you need to get your money out for an emergency? What about trying to sell your shares during the day? With a mutual fund, you can only buy and sell at the closing net asset value of the stock each night.

ETFs can look like a mutual fund by investing in several different companies in a sector. Where an ETF differ from a mutual fund is in the way you can trade it. No matter which natural gas ETF you invest in, you can trade it like a regular listed stock. You can buy and sell it throughout the day, unlike mutual funds where you can only get one price. ETFs can become a vehicle for day traders. Another advantage of a gas ETF is that you can place stop limit orders on it. If there is news that will adversely affect the price of your ETF, you can place a sell stop order that will immediately liquidate your position when it hits your price. If you invested in a mutual fund, you couldn’t get out until the end of the day. There would be nothing you can do as you watch the value of your natural gas mutual fund erodes.

The United States Natural Gas Fund, LP (UNG)

This is by far the most popular natural gas ETF. This fund invests solely in the front month natural gas futures contract on the New York Mercantile Exchange. The natural gas futures on NYMEX are the mostly widely traded and liquid market for Nat gas futures. This fund will attempt to match the daily price returns of the underlying futures contract. You are essentially trading natural gas future but with a twist. The fund DOES NOT use leverage when investing in futures. This will help protect the fund from wild swings due to leverage. As the month ends, the fund will then start to “roll” out of the front month futures contract before it expires and will “roll” in to the next month futures contract. This is a long only fund. So if you are bullish on natural gas prices, this may be a fund you should look into.

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