Natural Gas Futures Price
The
natural gas futures price is different than the natural gas price in the cash (physical) market. Generally, the price of a
commodity for future delivery is higher than the cash price due to carrying costs (insurance, interest, and warehousing fees).
This is called contango. The opposite of contango is backwardation. Backwardation is when the price of a commodity for future
delivery is lower than the cash price Backwardation is normal in a“seller’s market.”
When you trade natural gas futures, your futures
price depends on where you get into the market. After you post your initial margin, your profit or loss depends on where you
enter and exit the market (minus transaction costs).
For example:
The
contract size for natural gas is 10,000 million British thermal units. So each $.01 move equals $100. As the market moves
your account value adjusts. If your account value drops below the maintenance margin, a margin call is due. A margin call
can be met by offsetting positions or adding money to your account.
Trading futures is like driving a car without insurance. You save the insurance premium,
but if you crash you will wish that you were insured. If you have very deep pockets or deal with the physical natural gas
product then futures may be for you. If you are a speculator with a limited amount of risk capital then natural gas options
are a better way for you to invest in the natural gas market.
