Natural Gas Markets & Contracts

What is a ‘natural gas by wire’ strategy?

Selling natural gas supply and purchasing delivered power if the spark spread and transmission cost allow profit from power arbitrage.

Explain the Seaway and Capline pipelines and their significance.

Seaway reversed in 2011 to move crude from Cushing to Gulf Coast. Capline historically flowed north but has been reversed to move oil south to Gulf refiners.

Explain the role of natural gas in the U.S. energy market today.

Natural gas is the cleanest fossil fuel and a major part of U.S. energy. It supports electricity generation, industrial use, and residential heating, reducing oil dependence.

Describe the structure of the U.S. natural gas market pre-1978.

It was fully regulated: Producers sold to pipelines, which sold to LDCs and end-users at regulated prices, with limited spot transactions.

What changes occurred in the natural gas market post-1978?

Deregulation allowed unbundling of production, transportation, and marketing. Wholesale markets and financial trading tools like swaps and futures emerged.

What is the Henry Hub and why is it important?

Henry Hub in Louisiana is the delivery point for NYMEX natural gas contracts. It's the U.S. benchmark for gas pricing and sets national price signals.

What are the advantages of LNG?

LNG allows long-distance natural gas transport by reducing volume 630 times. It’s safe, clean, non-corrosive, and easily re-gasified for local use.

How is LNG priced in the global market compared to U.S. domestic pricing?

Global LNG often follows oil-linked pricing, while U.S. LNG is tied to Henry Hub spot prices, making U.S. exports competitive unless oil prices drop too low.

Why were many U.S. LNG cargoes canceled in 2020?

COVID-19 demand collapse, high inventories, and low global prices made U.S. LNG less competitive, leading to canceled cargoes at Freeport, Sabine Pass, etc.

What is a swing swap?

A contract to convert daily gas prices into a fixed price or vice versa. Useful for customers with daily needs who want pricing certainty.

Explain the process of First-of-Month (FOM) index gas pricing.

FOM index is the average price of physical gas trades during the last 5 business days of the prior month, commonly used in Inside FERC reports.

Describe the structure of the LNG value chain.

E&P → Processing → Liquefaction → Export → Shipping → Regasification → Pipeline Distribution → End Use (power, industry, city gas).

Why is daily pricing more volatile than FOM pricing?

Daily prices respond to immediate supply/demand, weather, and outages. FOM smooths price by averaging over 5 days.

Compare physical gas trading to financial trading in natural gas.

Physical: real delivery of gas via pipeline. Financial: trades price exposure only using futures, swaps, or derivatives with no delivery.

What risks are involved in natural gas trading?

Market risk (price), credit risk (counterparty default), operational risk (errors), and regulatory risk.

Describe how LNG is regasified after delivery.

LNG is warmed, returning it to gas form, then fed into pipelines like domestic natural gas.

Why did the LNG market decline in mid-2020?

Global pandemic reduced industrial demand, created high storage, and caused price crashes, especially in Asia.

How did the Panama Canal expansion help U.S. LNG exports?

It cut shipping time and cost to Asia, increasing competitiveness of Gulf Coast LNG projects.

What makes the natural gas market highly liquid?

Frequent trading at liquid hubs, large number of buyers/sellers, standardized contracts, and transparent reporting.

What do marketers do in natural gas trading?

They link physical and financial markets, manage risk, provide supply to customers, and execute basis or swap deals for clients.

Why is natural gas increasingly used for power generation?

It is abundant, efficient, cleaner than coal, and allows rapid ramp-up for peak loads.