Independent distributors and natural gas companies are actually middlemen who buy natural gas from producers. They arrange the transportation of natural gas and sell it to users. Dealers will actually hold natural gas (their own) for at least a short time, which can provide users with gas for one year or more. On the contrary, commodity traders of natural gas (considered as "day traders" or "brokers") are also intermediaries, but they never actually own their own natural gas. Traders only engage in trading for a short time, usually only a few months or even a day.
The transactions between natural gas distributors are different from those between natural gas producers and distributors, accounting for a large proportion of the total transaction volume. In 1997, in terms of procurement, 47% of the transactions are between dealers and 50% are with manufacturers. In terms of sales, 22% of the transactions are completed between dealers. Transactions between dealers are very important because they help to create a huge market.
Natural gas distributors and traders also trade with their counterparts in the power industry. By the 1990s, this kind of transaction was quite common, and the profit of this kind of transaction was quite high. For example, traders can increase the price of natural gas in new york by switching to natural gas power stations and sell natural gas at the local market price. In order to adapt to this change in power plants, these traders may buy electricity from Ohio and export it to new york.
Cash market
In commodity trading, traders buy and sell in cash, that is, "cash on delivery" (which creates a "spot market"). Commodity market is risky for investors, because natural disasters and global political situation will cause huge price fluctuations, and natural gas is an extremely unstable commodity, especially before the arrival of winter, both parties will speculate on the degree of cold weather. The spot market price provides a clue for natural gas users, that is, how much they will pay for future natural gas use.
Confirmation is another type of contract execution, which helps traders to control the risk of trading. "Confirmation" refers to verifying the independence of the contract. After the two traders make a deal, they will hand over the contract to their backstage (accountants and other managers), and they will contact each other to confirm and execute the contract.
Basic transaction
In long-distance pipeline transportation, the difference between the price of natural gas in one area and that in another area is called "basic market difference". Natural gas prices in different regions are different, depending on local supply and demand. In the financial natural gas market, transactions are conducted through "basic transactions", not just through transshipment of natural gas. Traders buy natural gas in cheap places, and then sell it in expensive places without transporting any natural gas, so as to get the maximum profit.
Pipeline companies can join this market and occupy a certain share, but the legal price list limits the difference in natural gas prices between the two regions. The price difference (tax rate) that rises to the price list is the transportation income of the pipeline company. In addition, the remaining profits will be owned by the distributor or distributor.
Futures and options
Natural gas futures contract is an investment method, which represents a gamble-whether the price of natural gas will rise or fall in the future. Futures contracts will enable investors to decide to buy or sell a certain amount of natural gas at a predetermined price on a certain day, while options will give investors the right to sell natural gas at a predetermined price at any time in a certain period of time.
Futures and options can help buyers and sellers minimize the risk of rapid appreciation or reduction of natural gas prices. For example, a buyer has a futures contract to buy a certain amount of natural gas at a unit price of $3 a year later, but before the implementation of this contract, the price of natural gas in the spot market rose to $4, so the buyer will still be protected by the futures contract.
Natural gas distributors hold more than half of the natural gas futures contracts in the New York Mercantile Exchange, USA, and bear the biggest risk of price integration between buyers and sellers. Other shares in futures contracts are controlled by producers, financiers, speculators and others.