Gas Price Behavior: Gauging Links Between Hubs and Markets

Fortnightly Magazine - April 1 1996
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Price disparities make hedging difficult (em all the more since futures close before bid week ends. Even so,

a strategy helps.

Gas markets in the United States are complicated, dynamic, and evolving. They offer significant commercial opportunities for some companies, commercial hazards for others.

Many companies find it difficult to estimate the price they will receive for gas the next year, month, week, or day. Even with two futures markets, companies still find it difficult or expensive to hedge price risk completely.

Today, understanding price behavior and knowing how to respond has commercial value. Moreover, in an evolving energy marketplace accessible to an increasing number of companies, market shares are sliced by competitive strategies supported by almost constant involvement in market activity.

Cash vs. Futures Prices

The most important relationship for a futures contract market probably lies in the expected near equality of futures and spot prices for the same delivery period at the close of trading of the futures market. If these two prices are not equal, trade between markets will soon bring them back into alignment. Traders, for example, will buy the commodity on the spot market and then sell through a futures contract when the futures price exceeds the spot price by more than the transaction cost required to complete the trade. However, gains from such risk-free trades accrue only to companies that constantly track the market.

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