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Gas Price Behavior: Gauging Links Between Hubs and Markets

Fortnightly Magazine - April 1 1996

the Virginia Tech Telestar Graduate Center. The views expressed are those of the author and do not necessarily represent those of EIA.

E-mail address: jhh1@msn.com

1 This analysis uses the settlement price of the futures contract on the final day of trading. An alternative would be to use the average of the settlement price on the last several days of trading of the futures contract. Both choices lead to similar results.

2 The first-of-the-month price indices, published by Inside FERC, an affiliate of McGraw Hill, largely represent prices during bid week and are popular for indexing contracts in the gas industry.

3 This estimate is a convenient example. A variety of relationships could be examined, and a variety of variables used for the futures price indices.

4 Inside FERC first-of-the-month price of spot gas, delivered to pipelines for Natural Gas Pipeline Co. of America in Oklahoma. (The "Mid-continent" location in Table 1.)

5 More active use of salt storage facilities also influences the cost of gas and pipeline transportation. Active use of these facilities exploit short-term price variability by making the decision to inject and withdraw gas from storage dependent on changes in the level of price throughout the year.

6 In primary market areas like Ohio, local supplies are available from nearby production and storage facilities. Thus, it is difficult to treat a certain area exclusively as a production area and another as a consuming area, as is all too frequently done.

7 Use bid-week spot prices between the Waha and Henry Hubs and other locations in computing price differences between locations for several reasons. At such locations, the bid-week price is approximately equal to a futures market or a forward market price, if a futures or forward market exists at the location. Statistical analysis shows that the futures settlement price at the close of trading of a futures contract provides a good estimate for bid-week spot prices at the Henry Hub, particularly over the last several years. Thus, the bid-week cash price at an active, liquid market is used as an estimate of a futures market price.

8 See, Emile J. Brinkmann and Ramon Rabinovitch, "Regional Limitations of the Hedging Effectiveness of Natural Gas Futures," The Energy Journal, Vol. 16, 3, 1995 113-124; and J.H. Herbert and Erik Kreil, "U.S. Natural Gas Markets-How Efficient are They?" Energy Policy, January 1996. See also, National Energy Board, Natural Gas Market Assessment, "Price Convergence in North American Natural Gas Markets," December 1995.

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