Commodity Derivatives: Markets and Applications

6

Natural Gas

Find gas once and you’re forgiven; find gas twice and you’re fired.

Old industry adage

SYNOPSIS The purpose of the chapter is to outline the different structures that exist in a number of natural gas markets, how and why natural gas is traded and a description of the most common derivative structures.

 

A short introductory section outlines how natural gas is formed and the different ways in which it is measured. A key influence on the industry is the impact of deregulation and subsequent re-regulation and how it has impacted the structure of the physical supply chain. Since natural gas markets tend to be more local in nature than those for say crude oil, the impact of regulation will differ between countries. An overview of the experience of the USA, the UK and Continental Europe in this respect is outlined.

The section on the demand for and supply of natural gas considers where the commodity is found, how much of it is left and where it is consumed. The growing importance of Liquefied Natural Gas is also discussed.

Since the natural gas market does not have a global pricing benchmark, the difficulty in defining price is considered. Some factors that influence the demand and supply for natural gas are highlighted and the importance of crude oil in pricing contracts in some markets is discussed.

The motivations for trading natural gas as well as the main locations where it is traded are introduced and from this the main derivative products used to manage the associated ...