EBF 301
Global Finance for the Earth, Energy, and Materials Industries

Mini-Lecture: Natural Gas & Crude Oil - Physical Pricing

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Even though the prices of energy "futures" influence the physical markets, prices are negotiated outside the infamous and chaotic trade floors of the exchanges. Buyers and Sellers, looking at their supply and demand situations, make pricing decisions daily and actually buy and sell the physical commodities. The results of these trades are reported in industry publications and become market indicators for the physical "cash" market.

Key Learning Points for the Mini-Lecture: Physical Natural Gas & Crude Oil Pricing

While watching the Mini-Lecture, keep in mind the following key points and questions:

  • Historically, prices were set for long-term contracts at fixed numbers.
  • De-regulation created the need for shorter-term pricing.
  • The physical commodity market has its own pricing scheme.
  • Cash market prices are reported by industry publications using survey methodology and are known as “indexes” or “postings.”
  • Inside FERC and Gas Daily are the main postings for natural gas.
  • OPIS (Oil Producers Information Service) and ARGUS are the primary reports showing postings for crude oil & natural gas liquids (NGLs).
  • Futures markets are very efficient due to a highly competitive environment. - is this mentioned in the video?
  • Financial commodity prices approximate the true value of the underlying commodity. - is this mentioned in the video?
  • Parallelism recognizes the fact that both financial and physical markets are influenced by similar things.
  • Convergence is the tendency for the financial contract to approach the value of the physical commodity as it approaches settlement.
  • Speculative Traders use both fundamental and technical analysis in making buy/sell decisions. - I'm not sure if this is addressed in the video. The term speculative is not.
  • Arbitrage is the act of taking advantage of price differences. - arbitrage is not mentioned in the video
  • Basis represents the difference in price between financial and physical markets. Locational Basis is the value between the financial commodity contract delivery point and other cash points. - I don't think this is this mentioned in the video. I don't see mention of "Locational basis"?

NOTE:

The lecture slides can be found in the Modules under Lesson 6: Energy Commodity Logistics - Crude Oil.

things in the lecture to be aware of

  • Some of the topics listed above don't seem to be addressed in the video but perhaps I am missing something...
  • There are 7 sub-topics in this video. Do you want to split them up into shorter videos? I am also looking into updating the powerpoint to make it more attractive and engaging. I hope to have an example in a few weeks.
    • Intro (45 seconds)
    • Regulated Industries and Natural Gas (about 3.5 minutes)
    • Crude Oil (about 2.5 minutes)
    • Methods for establishing price/ overview of major publications (About 3 minutes)
    • Natural Gas publications (about 2.5 minutes)
    • Crude Oil and Natural Gas Liquids Publications (1 minute)
    • Electronic Platforms (about 2.5 minutes)