2143 Natural Gas Marketers

Marketers come in varying forms, sizes, and descriptions. One can look at it much like purchasing gasoline at the local filling station—"Full-Service" or "Self-Serve." To add a little more variety or confusion, gas buying and selling is moving to ECommerce and the business-to-business Internet capabilities. When the start of marketing companies began in the mid-1980s to take the place of the merchant function performed by the pipelines, it was almost anyone with a telephone and a pencil could be called a natural gas marketer. Through the years, with a number of the marketing companies taking on added scope and abilities, the "fly-by-night," less reliable marketers were pushed out of the business. Even some of the more reputable, better financed groups have gone because of the inability to be profitable in a fast moving, sometimes, irrational market place. With financial trad ing exceeding high volumes of trading each day, risk becomes an even more important element of consideration.

Marketing natural gas is more than just selling and delivering gas to the consumer. The gas business is big business running into revenues of around $100 Billion per year depending on the exact price for the commodity that year. The $100 Billion is only a measure of the actual commodity trading on an idealized basis of direct trades from producers to marketers to consumers. Actually, an average cubic foot of gas most likely gets traded three to four times before coming to the consumer, the entity with the burner tip that will consume the gas and put it out of the market. This is only for the physical side of the trading—the place where the commodity actually is moved to a final destination for consumption. The total natural gas consumption in 1999 was 22 trillion cubic feet (Tcf).

This pales in comparison to the financial markets where 10 to 12 time the volume traded each day in the physical market of consumed gas is traded in the financial sector. The money moved in this arena is beyond the $100 Billion discussed previously. At times, the market is responding more to the financial than to the physical drives. The speculators are doing more to move the market than the actual users who need the natural gas for fuel or feedstock. Like all commodities, natural gas makes an ideal medium for financial trading. There are those who need to make a play in the market for the protection or risk-adverse properties the market gives. Those who produce the gas and those using large quantities can buy some protection of the future price by buying futures. This is "hedging." The futures buyer is taking a position for a given month in the future where the price he pays will be the price for the quantity of gas he purchased futures for on that given month. He/she has locked in the price for gas anywhere from a month forward to 36 months forward. Whether buying or selling gas, hedging is a tool to relieve some of the risk in buying or selling a relatively volatile commodity.

The volatility of natural gas prices (no pun intended) makes it an ideal commodity for speculators to make a market in it for the sheer purpose of making money. The speculator is betting the price will be higher or lower on a given date and is willing to take a position by buying the commodity for trading at that time. Much of the trading in natural gas is for speculation and this can only add to the volatility of the market place. While most of the hedgers bring a relatively simple mentality to the market place based on supply/demand parameters, the economy, and other pertinent factors, the speculators have a "statistics" of their own for playing the market. Basically, the speculators are "market technicians" and play a statistical analysis of the market itself for buying and selling the commodities. The mentality of the speculator is basically, "who needs to know all the details of the commodity, the market place itself shows the results and following the market place with its own statistical tools is the way to go." Of course, many of these speculators are very large in the amount of money they control. When the signals show its time to buy or sell, very large sums of money can come into or leave the market. Easy to see how this can make the price of the commodity very volatile. Figure 21.5 shows the prices for natural gas, coal, and crude oil for the last five years to give a comparison among these three major fuels for electric generation as to the market volatility of each one.

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