Natural Gas

 Weekly seaonality

- a lot of gas is used on Monday mornings to restart industrial fa- cilities and reheat offices after the weekend

- less gas is used late at night on Saturday because there is no industrial demand and houses are less heated after people are asleep

Trading Activity by Instruments

Power & Gas

- NYMEX futures 50-70%

- forwards 20-30%

- options 10-20%

- swaps 10-15%

Crude oil

- futures 60-80%

- forward 10-20%

- options 15-25%

- swaps 10-15%

Equity

- futures 20-30%

- options 40-50%

- forwards 5%

- cash equities 50-70%

FX

- spot 40-50%

- forwards 30-40%

- options 10-20%

- futures 10-15%

Bonds

- cash market 60-80%

- futures 20-30%

- options 5-10%

- swaps 20-30%

Futures in Asia

- JKM futures contract is mostly traded in SGX (60-70% of all JKM futures trades) and ICE Futures Singapore (20-30%)

- Japan OTC EXchange (JOE). trading in energy derivatives, including natural gas contracts linked to the Japan Korea Marker (JKM) for LNG.

- SGX: LNG futures contracts, including those based on the Platts JKM index

- China

    - Shanghai International Energy Exchange (INE)

    - Zhengzhou Commodity Exchange (ZCE) and Dalian Commodity Exchange (DCE)

Futures contracts for electricity are distinct from the day-ahead and real-time auctions. Traded on the New York Mercantile Exchange (NYMEX) or the Intercontinental Exchange (ICE).

RTOs/ISOs: manage the day-ahead and real-time auctions and are responsible for the physical delivery of electricity within their respective grids. Only power plants and other direct market participants (e.g., load-serving entities) typically participate in these auctions.

Futures: 60-70%

Forward: used by big natural gas producers, more common among utilities and large industrial users, less by traders 30-40%

Front month futures/forward: 50-70%

Seasonal contracts: peak winter (nov to march), summer (jun to sep)

Longer-dated contracts: less common, 10-20%, more for hedging and planning by utilities and large consumers

Current/ prompt/ spot month contract - traded more during early of the month, or when volatility spiked due to certain market events (e.g., unexpected weather patterns, supply disruptions). Liquidity of current month contracts decreases as people roll over to next month. 

Energy (heating and electrical generation) is a secondary market for oil. The primary market for oil is as a transportation fuel and raw material for the plastics industry

Peaking Suppliers: Many of these power plants are essentially jet engines. Fuel is pumped in and ignited; there are a minimum of moving parts and a lot of wasted heat energy. Many of these plants only operate a couple hundred hours a year. In o3rder to recover costs, they will charge very high prices. These plants will operate almost exclusively in the real-time auction market except when day-ahead prices are extremely high.

Base- load generators are always going to bid low—they need to operate full-time. Peaking generators are always going to bid high—they are extremely expensive to operate. Mid-merit generators are going to bid in both day-ahead and real-time markets, and will usually set the price of power.

Bidding Strategies

For example, it might be possible for a power plant to increase the price of power by $1 if it is willing to bid aggressively into the day-ahead market. However, if aggressive bidders stand a 10 percent chance of being inactive, the decision is complicated for providers that are already highly profitable. If the price of power is around $100, it wouldn’t be worthwhile for a plant with a cost basis of zero to give up $10 (a 10 percent chance of being inactive and giving up 100 dollars) for a chance to make an extra $0.90 (making an extra dollar 90 percent of the time).

At the other extreme, a power plant with a very expensive cost of production would have a different reaction to the same decision. With a $95 cost of production, a power plant benefits substantially from ag- gressive bidding. In this case, the power plant would only give up $.50 (giving up a $5 profit, 10 percent of the time) for an extra $0.90 (an extra dollar 90 percent of the time).