Published on EBF 301: Global Finance for the Earth, Energy, and Materials Industries (https://www.e-education.psu.edu/ebf301)

Home > Course Outline > Lesson 5 - Cash Market Pricing Methodologies & Publications

Lesson 5 - Cash Market Pricing Methodologies & Publications

Lesson 5 Introduction

Overview

Energy is being consumed at every hour of the day everywhere on earth. Thus, energy commodities are being bought and sold constantly to fill this demand. When we are talking about prices for the actual physical production and consumption of natural gas and crude oil, we are talking about the "cash" market. In this lesson, we will explore the ways in which cash prices are established in the physical marketplace, historical pricing, the main publications that report these prices, and the methodologies they use to collect the data.

Learning Outcomes

At the successful completion of this lesson, students should be able to:

  • Gain a sense of historical natural gas “cash” market pricing
  • Understand the methodology for cash price determination
  • Become familiar with key industry pricing publications and their uses
    • Platt's Inside FERC
    • Platt's Gas Daily
    • OPIS & ARGUS Price Reports for NGLs and Crude Oil.
  • Review historical price trends
  • Discover online price data resources

What is due for this lesson?

This lesson will take us one week to complete. There are a number of required activities in this module. The chart below provides an overview of the activities for this lesson. For assignment details, refer to the location noted.

All assignments will be due Sunday, 11:59 p.m. Eastern Time.

Lesson Requirements
REQUIREMENT LOCATION SUBMITTING YOUR WORK
Lesson Quiz Modules > Lesson 5: Energy Commodity Logistics - Crude Oil Submitted through Canvas
Mini-lecture: Pricing - Physical Natural Gas & Crude Oil Mini-lecture: Pricing - Physical Natural Gas & Crude Oil page No submission
Lesson Activity Lesson Activity page Submitted through Canvas
Fundamental Factors (on-going) Lesson Activity page Submitted through Canvas

Questions?

If you have any questions, please post them to our General Course Questions discussion forum (not e-mail), located under Modules in Canvas. The TA and I will check that discussion forum daily to respond. While you are there, feel free to post your own responses if you, too, are able to help out a classmate.

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

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 ARGUSare the primary reports showing postings for crude oil & natural gas liquids (NGLs).

NOTE:

The lecture slides can be found in the Modules under Lesson 5: Energy Commodity Logistics - Crude Oil.

Lesson 5 Activity

Cash Price Activity

Familiarize yourself with one of the industry publications that reports physical, cash prices for natural gas. Inside FERC, Gas Daily and, OPIS do not allow their publications to be copied unless you have a subscription and receive prior permission. However, you can access natural gas cash prices from the Natural Gas Intelligence website [1]. These come directly from the electronic trading platform The Intercontinental Exchange (ICE). They are actual transactions for physical natural gas trades at the specified locations. ICE is based in Atlanta, GA. and they also own the ICE Futures Europe in London.

Important Note

You might not be able to access the latest natural gas cash prices through NGI. In that case, use the sample prices provided in the NGI website and include a screenshot in your submission. 

The cash hubs that you might see in the report are:

  • EAST - "Transco Z6 (NY)" - this is the price of gas delivered to NYC.
  • GULF/TEXAS - "Henry" - this is the physical delivery point for financial natural gas futures contracts (Lesson 3)
  • GULF/TEXAS - "Houston Ship Channel" - this is the price of gas delivered to the huge petrochemical refining corridor east of Houston (Lesson 3).
  • MIDCONTINENT - "NGPL Midcont" - this is the price for gas in Western OK and the Texas Panhandle. It is also the area we used in Lesson 5 as an example for transportation costs.
  • WEST - "SoCal Border" - this is the price of gas delivered to the border of California for Southern California Gas Company ("SOCAL"), the country's largest LDC.
  • WEST - "Waha" - this is a major pipeline "hub" in West TX (recall the national pipeline grid which shows pipes intersecting one another), which reflects Texas demand as well as demand in NM, AZ and CA.
  • WEST - "Kingsgate" - this is an import point for Canadian gas.

Please chose four of these hubs. Report the following information for the selected four hubs plus the national average (last row): 

  • "Range" - the high and low price traded on the day.
  • "Volume (mmbtu)" - the total amount of gas traded at that location that day (in thousand MMBtus).
  • "# Trades" - the total number of transactions at that location.

    Please also include a screen shot or PDF printout of the Natural Gas Intelligence website to verify your reported prices. Do not simply submit a screen shot of the web site. You must submit both the screen shot and a typed response with your reported prices.

    The Natural Gas Intelligence website is a great resource for when you work on your weekly Fundamental Factors for natural gas. You can indicate where cash prices are trading, and that may help you with your trading decisions.

    Grading

    This activity, due at 11:59 pm on Sunday, is worth up to 20 points on the EBF 301 grading scale. 

    Fundamental Factors

    The Fundamental Factors activity is due as usual this week, at 11:59 pm on Sunday, and is worth 30 points on the EBF 301 grading scale. Please refer to the Fundamental Factors Instructions [2] for additional information and grading rubric.

    Submitting Your Work

    Cash Price Activity: Submit your work as a word processed document to the Lesson 5 Cash Price Activity in Canvas.

    Submit your work as a single word processed document to the Lesson 5 Fundamental Factors Activity in Canvas.

    Summary and Final Tasks

    Key Learning Points: Lesson 5

    1. Cash prices reflect physical commodity trading.
    2. “Posted” prices or “Indexes” represent the market price.
    3. Publications poll market participants and calculate “weighted” average prices.
    4. Indexes are posted daily, weekly, monthly.
    5. Three main price publications exist for natural gas.
    6. Two main price publications exists for crude oil & natural gas liquids.
    7. Market price publications are subscription only.
    8. The U.S. Energy Information Administration [3] has extensive current and historical market pricing for natural gas, crude oil and natural gas liquids.

    While copyright laws prohibit me from reproducing copies of their reports, here are the website links so you can see the data and, in some cases, view a sample report.

    Platt's Gas Daily - http://www.platts.com/IM.Platts.Content/ProductsServices/Products/gasdaily.pdf [4]

    Platt's Inside FERC - http://www.platts.com/IM.Platts.Content/ProductsServices/Products/gasmarketreport.pdf [5] (pages 6 & 8)

    OPIS - http://www.opisnet.com/Images/ProductSamples/NAmericanLPGReport-sample.pdf [6]

    ARGUS - http://www.argusmedia.com/Crude-Oil [7]

    In this lesson, we addressed the physical cash marketplace that, for the most part, deals with the "here and now." In the next lesson, we will delve into the financial "futures" markets, whereby commodity prices can be obtained for future months and years.

    Quiz

    Log onto Canvas and complete the Lesson Quiz.

    Reminder - Complete all of the lesson tasks!

    You have reached the end of this lesson. Double-check the list of requirements on the first page of this lesson to make sure you have completed all of the activities listed there before beginning the next lesson.


    Source URL: https://www.e-education.psu.edu/ebf301/node/503

    Links
    [1] http://intelligencepress.com/features/intcx/gas/
    [2] https://www.e-education.psu.edu/ebf301/680
    [3] http://www.eia.gov
    [4] http://www.platts.com/IM.Platts.Content/ProductsServices/Products/gasdaily.pdf
    [5] http://www.platts.com/IM.Platts.Content/ProductsServices/Products/gasmarketreport.pdf
    [6] http://www.opisnet.com/Images/ProductSamples/NAmericanLPGReport-sample.pdf
    [7] http://www.argusmedia.com/Crude-Oil