Natural Gas Trading
Natural gas is marketed on a number of trading platforms that are located at "market hubs" across North America. Natural gas prices are established via electronic trading systems and based on the market forces of supply and demand.
There are two distinct markets for natural gas: the spot market where natural gas is bought and sold on the daily market, and the futures market that involves buying and selling natural gas in advance under contracts with terms out at least one month.
Spot and future prices are established through the interaction of supply and demand on various trading platforms, such as the New York Mercantile Exchange (NYMEX) in the U.S. or the Natural Gas Exchange (NGX) in Alberta. Natural gas prices in North America are primarily determined by traders entering into NYMEX contracts, with prices being established through offers (to sell) and bids (to buy) on future months’ delivery commitments.
Alberta’s gas prices are based on NYMEX contract prices that have been discounted to reflect such factors as the province’s supply basin, foreign exchange rates between Canada and the U.S., and the conversion process from MMBtu to gigajoules (GJs). The daily spot price is determined by the NGX trading system and is referred to as the “AECO C/NIT” spot price. This price has become one of North America’s leading price-setting benchmarks and influences the value of future term contracts. The majority of natural gas is sold into the daily spot or cash market where the delivery period is for one day.
Natural gas trading may be categorized as physical trading that involves buying and selling the physical commodity, and financial trading in which buyers and sellers do not take physical delivery of the natural gas. Financial trading involves derivatives and sophisticated financial instruments and is used to provide a hedge against the risk of price movement or to generate profits by taking advantage of price differentials.