The Natural Gas Hedge

When you hear the term “hedge” perhaps from a Retail Electric Provider or salesman working for an energy company or brokerage you may feel out of the know because if you are not educated in energy terms this may make no sense to you.

A hedge basically creates a position in the futures market that is exactly opposite to what you bought or sold into. This creates an equal correlation with the investment so that if the market goes up or declines you will still be at the original price you bought or sold into. In case you do not know you can sell short or buy long into the natural gas futures market. This means you can make money if the market goes down or make money if the market goes up depending on if you go short or long. That is why you can hedge in the opposite direction after buying long into natural gas futures.

The principle of hedging is simple. It is an equal and opposite position in the energy marker so that if there is a loss in one market it will be completely or as close to it as possible be made up in the other market thereby preserving the original price.

More about natural gas

Natural Gas Prices

Gas rose a fraction today

 Natural Gas Prices today rose a fraction higher but not enough to cause a stir. Yesterday we saw them close at $6.20 MMBtu and today they are at $6.29 MMBtu. This small move has seen the markets remain flat across sectors that correlate strongly with this carbon fuel.

Flat market with Electricity in the state of Texas

Texas electricity has maintained a flat market today with this news and could possibly see electric rates drop tomorrow with no new signs of tropical storms in sight and summer heat remaining around the same temperature we have been at.

Texas has the wettest year on record

One possible cause for lower then usual summer temperatures could be to the fact that rain has kept the temp down enough that Texans do not turn up the air conditioning quite as high. According to recent news Texas has had the wettest year on record starting with the first 7 months of the year. This has been the first no drought year in a decade.

Weather pattern reaches outside of Texas

This wet weather is not just affecting Texas but is similar all around the bordering states and into the carribean. Electricity Rates and Natural Gas continue to cut those who rely on them a break adding needed dollars to the bottom line. Let’s hope the weather and the energy rates remain low for a few more months.

A gradual trend down in the settlement price, that isn’t what they said would happen?

The Natural Gas Price in the United States has shown a gradual trend down over the last 2 months. It seems quite strange to many as they have been told by the electricity providers to hurry and sign up before the summer because natural gas will be in high demand as people start to turn on their air conditioning and using up all that electricity.

Has the summer caused a spike in Natural Gas Prices?

The summer has had the opposite effect. There has been more then enough natural gas in storage to meet with the demand. This surplus has caused energy traders to rethink things this year as the natural gas price has been trading low over the last two months. In Texas we have a 90% correlation with natural gas in terms of electricity and so we have seen electricity prices go from the high 9’s down to below 7 cents per kwh the last 2 months. Many people are scratching their heads after being told to sign up on the 9 cent electric rate when now in the dead heat of summer we are seeing rates as low as 7 cents a kwh.

Did the electric provider at TXU lie to me?

No they didn’t lie they just speculated on what natural gas usually does every year. During the summer you see some superficial spikes up when people turn on their air conditioners. This then effects the storage supply’s of natuarl gas so when these air conditioning spikes occur they lose that storage necessary to cover peak demand times. This comes very close to causing a shortage and so the price goes up. So did they lie to you? No you can’t call it that. Sure they wnted your sale but they were actually giving you a decent guess as to what might happen. Are sales people dishonest? Many times yes and they can sometimes offer you more information but this time we can’t say they lied.

Overview:  Thursday, July 20, 2007

Natural gas spot prices decreased across the board since July 11 in almost all states.  Prices at the Henry Hub came down 41 cents per MMBtu, about 6%, since July 11, to $6.24 per MMBtu. 

At the NYMEX, the futures contract for August natural gas delivery at the Henry Hub settled on July 18 at a price of $6.528 per MMBtu, falling 7 cents per MMBtu, about 1% since July 11. 

Natural gas in storage was 2,692 Bcf on July 13, which is 16% above the 5-year average (2002-2006).  The spot price for West Texas Intermediate (WTI) crude oil gained $2.45 per barrel on the week to $75.03 per barrel or $12.94 per MMBtu.

In Texas Electricity rates followed with electric prices down to as low as .075 cents per kilowatt hour in some areas of the state.