Assessing Natural Gas Markets
Natural Gas prices are established on various trading platforms and/or exchanges. EcomEnergy will be referring to the NYMEX (New York Mercantile Exchange) and the Globex (Nymex on the Chicago Mercantile Globex) exchanges for assessing price movements. In assessing the Natural Gas market it is very important to understand “who” is participating in creating price. The market and these exchanges have two predominant groups of players;
- Commercial sector - which consists of producers and consumers of the commodity and
- Non-commercial sector - which consists of the investment groups (sometimes referred to as the Funds or speculators) which gamble on price movements but rarely take delivery of the commodity.
These two groups have different roles in establishing price. The commercial sector takes a position from a hedging perspective - establishing a price and holding the position in their portfolio until delivery occurs. The non-commercial sector is characterized as ‘trend’ players - most trade in and out of positions based upon recent directional movements. The non-commercial sector also provides an extremely important role for the market - liquidity. Contrary to current political and public opinions, speculation plays a very important role in commodity trading. When prices are falling, producers don’t want to sell but consumers want to buy- the funds step in and provide the market a mechanism to facilitate the transaction. They also provide a similar role in rising markets when the consuming segment is not interested in establishing positions. Both groups establish their positions based upon interpretation and expectations of current and future events. By combining the fundamental information with the technical spice an accurate assessment of the perceptions and behavior of trading participants can be established. This is the basis of an inclusive platform for hedging and trading strategies.