Natural Gas (NG) Energy Contract

The contract unit for natural gas is 10,000 MMBtus-- that is, 10,000 million British thermal units. Prices are quoted in US dollars and cents, and the minimum fluctuation between trades has to be 1/10 of a penny or what we refer to as a tick. Trading hours are exactly the same, but the trading months for natural gas-- you can actually trade natural gas out 12 years if there was, in fact, a need to buy or sell for that long of a period of time.

Last trading day for natural gas contracts, the futures, is the third business day prior to the first calendar day of the delivery month. We do trade options in energy futures contracts. In the case of natural gas, those expire one day prior to the actual contract itself.

The delivery point for buying and selling under NYMEX natural gas contracts is a place known as the Henry Hub in Erath, Louisiana. Texaco has their Henry plant in Erath, Louisiana. Sabine Pipeline Company runs the hub on behalf of the New York Mercantile Exchange. And again, the delivery period is to be uniform across the month of production for which the contracts were exchanged.

This is a schematic of the pipelines going in and out of the Henry Hub. There are various sources of natural gas coming offshore. Onshore, there is gas moving to the Northeast, the Southeast, the Upper Midwest, as well as from Louisiana back into Texas. So it made an ideal market hub for indicating various supply and demand.

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Every day, the New York Mercantile Exchange will put together a final price for that day's trading. The settlement price is the weighted average of all the trades that occur during the last two minutes of trading in that regular session. Now, when the closest future month, or what we call the prompt month, when that contract expires, they're going to take the total number of trades in the last 30 minutes to come up with a weighted average, and that will be the price for that month. And that month rolls off, as we say, and it's in the history books.

Margin requirements for natural gas are substantially less than crude oil, but the value is substantially less, so there's only $2,100 margin requirement per contract.

This is what a natural gas futures screen would look like. If you ever see one of these on a trading floor or somewhere else, perhaps on someone's screen who trades in these contracts, this is what it would look like.

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