As the world market for natural gas is fragmented in different regional markets, it is not possible to talk about a world price for natural gas. Although there is a market liberalization trend all over the world, in many countries natural gas markets are still highly regulated. As a result of different degrees of market regulation, natural gas prices differ among countries. In North America, for example, where the market is highly liberalized, prices are very competitive and respond to demand and supply forces. After liberalization, natural gas prices have declined significantly. On the contrary, in the Russian Federation, where there is a clear monopoly, domestic prices are kept artificially low while gas is sold in foreign markets at higher prices in order to recover loses. In Europe, sales price for natural gas is most often based on competition with alternative fuels.

Natural gas prices may be measured at different stages of the supply chain. At the beginning, there is the wellhead price. Prices are also measured for different end-user groups as residential, commercial, industrial consumer or electric utilities. Prices at the wellhead show high volatility depending on weather and different market factors. Increasing efficiencies in transport, storage and delivery allow for consumers to reduce the impact of price volatility.

In general, the main components of natural gas price are:
- wellhead price (the cost of natural gas itself or commodity cost)
- long-distance transportation cost
- local distribution cost

In North America, wellhead prices were the first to be deregulated. Transportation costs are still regulated by National Energy Boards, while local regulatory boards regulate local distribution costs.

According to EIA, in 2000 wellhead price represented 34% of residential natural gas price, while transport accounted for 19% and distribution to customers 47%. The largest share of the final price is made up by distribution costs. As most large industrial and commercial gas users tend to buy gas from producers or market makers, they reduce their price considerably.

The major demand factors are weather and economic activity. Due to the importance of the weather factor, natural gas demand is highly seasonal. Other forces affecting demand are population changes and natural gas user trends. Changes in legislation concerning air pollution control may lead to increasing demand for this clean fuel. Supply factors are transport availability and accessibility as well as the physical amount of natural gas being produced and the level of stocks.

Natural gas competes with other sources of energy as oil, electricity or coal. Natural gas price is particularly pegged to that of oil, since oil is natural gas closest substitute and supply of oil and natural gas are closely linked.

Like most commodities, natural gas prices are cyclical. Their increase as a result of higher demand encourages exploration and drilling (as it happened in 2000). Although it takes some time for the production industry to respond to a price signal, once production increases prices tend to fall. However, market fundamentals indicate that in the future natural gas prices may not fall to the low levels of the past years.

Main international benchmarks for natural gas prices in North America are Henry Hub (New York Mercantile Exchange) in USA and AECO (Natural Gas Exchange) in Canada. In Europe relevant benchmarks at present are the Heren Index (British National Balancing Point) or the Zeebruge Hub (Belgium). IPE (International Petroleum Exchange) Natural Gas futures price is also expected to become an international benchmark as Europe develops competitive markets.

* For more detailed information on natural gas prices see:
- Natural Gas Prices: Overview of Market Factors and Policy Options:
ttp://www.cnie.org/NLE/CRS/abstract.cfm?NLEid=16791
- Natural Gas prices in the EU between 1998 and 2000, Eurostat, July 2000, American Gas Association- Issue Focus: Natural Gas Prices:
http://www.aga.org
- Natural Gas Prices in Competitive Markets, IEA;1998:
http://www.iea.org/textbase/nppdf/free/1990/gp98.pdf

Risk Management Instruments Markets and Contracts

Risk management instruments are well suited to manage the increasing price risk that accompanies the market changes resulting from liberalization.

Natural Gas Futures and Options are mainly traded in New York Mercantile Exchange, International Petroleum Exchange and Kansas City Board of Trade.

New York Mercantile Exchange, NYMEX (http://www.nymex.com)

Nymex launched the world's first natural gas futures contract in April 1990. Options on natural gas futures were launched in October 1992. Open outcry trading is conducted from 9:30 A.M. - 3:10 P.M. After-hours trading in futures and options is conducted via the NYMEX ACCESS® electronic trading system from 7 P.M. to 9 A.M. on Sundays and 4 P.M. to 9 A.M., Mondays through Thursdays. All times are New York times. The market is traded in 10,000 million British thermal unit (BTU) contracts, with a minimum price fluctuation of 0.1 cents per million BTU indicating a change in value of $10.00 per contract.

The New York Mercantile Exchange, the world's leader in providing a market venue for trading physical commodities and managing their risk, is introducing a global, neutral, electronic trading platform destined to become the premier exchange for forward trading and clearing contracts in a wide range of energy and metals products. Enymexsm will provide a one-stop shop for commodity risk management, combining the best of on-Exchange trading with products that were previously only available over-the-counter. By capitalizing upon the Exchange's 128 years of market expertise and more than two decades of designing and offering standardized energy futures and options contracts, enymexsm will eliminate the opaque pricing, lack of liquidity, and counterparty credit risk that exists in the phone- brokered OTC market and on other trading systems.

Kansas City Board of Trade (http://www.kcbt.com)

While natural gas futures originated at the New York Mercantile Exchange, the contract offered there was oriented to the eastern U.S. market, leaving western natural gas marketers--who faced supply and demand situations different from those in the east--without a risk management tool. The Kansas City Board of Trade, following requests from the natural gas industry, stepped in to fill out this vacuum by launching its western natural gas contract.

International Petroleum Exchange, IPE (http://www.theipe.com)

A group of energy and futures companies founded the IPE in 1980 and the first contract, for Gas Oil futures, was launched the following year. In 1997, despite the advantages of open outcry markets, the IPE moved away from tradition when launching its Natural Gas futures contract. This contract is traded through a revolutionary automated energy trading system (ETS) located within customers' offices. Many exchanges are looking into or introducing electronic trading systems in an effort to provide extra services to the market. The IPE is also looking to do this, for example, offering out-of-hours facilities for Members.

The IPE aims to become an integral part of the European natural gas market, as liberalisation and competition become established.

Other important exchanges in this area are:

Intercontinental Exchange (http://www.intcx.com)

The Intercontinental Exchange is an Internet-based marketplace for the trading of over-the-counter energy. It represents the partnership of world leading financial institutions with some of the world's largest diversified energy and natural resource firms.

Natural Gas Exchange (http://www.ngx.com)

NGX, located in Calgary, Canada provides electronic trading and clearing services to natural gas buyers and sellers in Alberta, one of the largest and most significant production areas of natural gas in North America. Since its inception in 1995, NGX has grown to serve over 120 customers with trading activity averaging 200 BCF (211 000 TJ) per month. Among the customers at NGX are most of the major North American players at the energy market. NGX has quadrupled turnover since 1997 and is expected to grow fast in the future on the basis of a new clearing structure and a wider range of products. Electronic trading is provided at the AECO/NGX Intra-Alberta Market Centre, NGX Empress Market Centre and the NGX Union Dawn Market Centre. NGX acquired the AECO "C" & NIT Daily Spot, One-Month Spot, and Bid-Week Spot gas price indices (Alberta Gas Price Indices) from Canadian Enerdata Ltd. last September. NGX Canada Inc. (NGX) is a wholly owned subsidiary of OM AB (OM).

Altra Market Place (http://www.altra.co.uk)

Formerly known as Altrade™, the Altra Market Place offers real-time online electronic trading for energy commodities where traders actively view and exchange bids and offers quickly and anonymously. Accessible 24 hours a day, seven days a week, the Altra Market Place benefits traders by offering extensive market price and volume discovery, enhanced information about supply and availability, reduced administration costs and reduced transaction risk due to supply and payment guarantees.

* For details on these exchanges and contract specifications, visit their corresponding homepages.

Main Physical Markets

Apart from the use of risk management instruments, natural gas is traded in contracts for physical delivery. There are spot market sales or long-term contracts.

Traditionally natural gas contracts were long-term contracts between integrated natural gas companies and users, with fixed prices, reduced supply and price risks and little flexibility. The importance of these contracts has been reduced as a result of liberalization of the industry, while spot markets have increased their presence. Spot markets allow for greater flexibility to balance supply and demand in order to react to changing market conditions. Participants in the natural gas markets can then form a portfolio of long and short-term contracts. However, most of the gas that is internationally traded is under long-term contracts.

Spot markets are generally created in areas with concentration of buyers and sellers as pipeline interconnections located close to large consuming regions or major terminals of gas producing countries. Spot prices are then set at various locations. Main references for spot prices in North America are: New York City Gate, Henry Hub Louisiana, Chicago City Gate, Katy Hub Texas, So. Calif. Border or AECO Hub (Canada).

Price Links

Natural Gas Intelligence
EIA Natural Gas Weekly Update
EIA Short Term Energy Outlook
EIA Natural Gas Markets, Status and Outlook:
Eurostat
Energy Intelligence Group
Reuters
CNN
Alaron Trading Corporation
Barchart.com
Bloomberg
World Bank Commodity Price Data (Pinksheet)
Oil and Gas Online
Crude Oil and Natural Gas Prices (worldnews.com)
WTRG Economics
TFC Commodity Charts
Enerdata
Energy Shop
Ino.com
The Heren Report
Energy and Power Risk Management Magazine

 

Historical Prices

The following graphs illustrate to some extent the evolution and volatility of natural gas prices in the last years.

Distribution of the different gas prices (dollars per thousand cubic feet),
from wellhead to commercial consummer, USA, 1988-2005

Source: UNCTAD based on data from Energy Information Administration

Natural gas, Henry Hub ($/MMBTU), 1996-2005

Source: UNCTAD based on data from Thomson Datastream

International gas prices (US $ per million BTU), 1985-2004

Source: UNCTAD based on data from BP Amoco, Statistical Review of World Energy 2005
Note: Japan cif is for LNG

Breakdown of natural gas prices

Source: UNCTAD based on data from Energy Information Administration, natural Gas Monthly May 2003