Natural gas prices are quoted as spread from the index (such as Henry Hub in the US). Then the spread is called the basis price at a location.
all-in price = index price + basis price
The all-in prices are commonly used by retailers. The basis prices - by traders. The consumers would receive the full price which is the all-in price to the city gate plus the local distribution costs, which can make up to half of the total bill.
Directional trades are uncommon due to the seasonal nature of the gas prices. Instead, traders usually seek exposure to basis prices, not the actual or all-in. To expose to only the basis part traders trade futures contracts at a hub and a basis swap contract that "swaps" the hub with another location. See Energy spread options.
 Spot vs Future/Forward
Spot and future markets (and the relationship between) in the context of natural gas are fundamentally different from the financial markets. There different fundamental forces that determine spot and the future prices. The spot prices are determined by current supply and demand and the (residual) capacity of the system. Spot prices can be extremely volatile.
The forward prices are determined by macroeconomic forces and long term expectations.
The (lack of) relationship between the spot and the forward prices of the gas markets is due to the physical properties of the commodity:
- hard to store (can't buy today cheap and use tomorrow, have to buy on the spot market tomorrow)
- hard to transport (can't buy where its cheap and use where its expensive - need a pipe)
...and economic utility properties:
- valuable only when needed
- is valuable only when consumed
- inherent discrepancy between cyclical demand and constant optimal flow
These properties make the forward curve cyclical buy much less volatile and the spot curve very volatile and hard to predict.
- weather (single biggest determinant)
- not linked to spot prices!
- volatility determines the attractiveness of fuels - mechanisms to dampen volatility are necessary to make natural gas attractive. See S-curve.
- world economic growth;
- shale extraction technology;
- global LNG;
- carbon rules;
- legislation and capex in renewables may curb world gas demand growth (intermittent mitigation);
- coal replacement;
- continued replacement of light and heavy fuel oil in buildings and industry;
- natural gas vehicles are viable, either as CNG, LNG or marginally natural gas and renewable-based electric vehicles.
 Long term relationships
It is important to understand that the long term gas supply is determined by the forward prices and demand (not vice versa). Higher prices make more reserves economical. Long term forward prices send signals to NaturalGasMarketParticipants to explore, develop and invest in more storage and transport capacity. So in the long run the spot price are related to forward prices via the development of natural gas capacities and reserves.
 Geographical price areas
Due to gas being costly to transport, price zones are formed by geographical phenomena, such as: oceans for LNG or mountains for pipelines.
 Rules of thumb
- When sellers market - LTC gas prices linked to substitute fuels (mostly oil)
- When buyers market - LTC linked to spot market prices that are determined by NaturalGasPeckingOrder
- Price marker (hubs, LTC, IPC, JCC)
- LNG price to Oil price slope 8%-15% due to S-curve
 Price formation mechanisms
Recently the spreads of gas prices have increased due to different fundamentals driving the price formation. Price formation mechanisms:
- Oil Price Escalation (21% of total consumption, mostly LNG and in Asia)
- Gas-on-Gas Competition (36% of total consumption; most growing)
- Bilateral Monopoly
- Netback from Final Product
- Regulation Cost of Service (12% - domestic consumption)
- Regulation Social and Political (12% - domestic consumption)
- Regulation Below Cost (12% - domestic consumption)
- No Price
- Not Known
 Gas-on-Gas Competition
- 36% of total ww gas consumption;
- most growing (30% - 36% 2005 - 2009)
- growth of trading hubs in the EU
 Gas price globalisation
- in terms of price formation mechanisms not price convergence
- first NA->EU later Asia
- LNG is key factor
- EU and US hubs influence Asian LNG prices already
- flexibility and diversified supply sources key
- oil is not the reference fuel anymore (gas-on-gas)
- spot prices included in EU contracts and revision clauses
 Gas price markers
- hub, border, wellhead, city-gate
 LNG pricing
There are three major pricing systems in the current LNG contracts:
- Oil indexed contract used primarily in Japan, Korea, Taiwan and China;
- Oil, oil products and other energy carriers indexed contracts used primarily in Continental Europe; and
- Market indexed contracts used in the US and the UK.
The formula for an indexed price is as follows: CP = BP + β X
- BP: constant part or base price
- β: gradient
- X: indexation
The formula has been widely used in Asian LNG SPAs, where base price refers to a term that represents various non-oil factors, but usually a constant determined by negotiation at a level which can prevent LNG prices from falling below a certain level. It thus varies regardless of oil price fluctuation.
 Oil parity
Oil parity is the LNG price that would be equal to that of crude oil on a Type:Barrel of oil equivalent basis. If the LNG price exceeds the price of crude oil in BOE terms, then the situation is called broken oil parity. A coefficient of 0.1724 results in full oil parity. In most cases the price of LNG is less the price of crude oil in BOE terms. In 2009, in several spot cargo deals especially in East Asia, oil parity approached the full oil parity or even exceeds oil parity.
- In beginning of the 1990s oil-gas spread (+4 USD/MMBtu) triggered fuel switching;
- Current spread levels (>10 USD/MMBtu) allow for investment into additional gas applications (power generation, heating, transport). Global switching saving of around $400bn (Cambridge Energy Research)
Many formula include an S-curve, where the price formula is different above and below a certain oil price, to dampen the impact of high oil prices on the buyer, and low oil prices on the seller.
 JCC and ICP
In most of the East Asian LNG contracts, price formula is indexed to a basket of crude imported to Japan called the Japan Crude Cocktail. In Indonesian LNG contracts, price formula is linked to Indonesian Crude Price.
 Brent and other energy carriers
In the continental Europe, the price formula indexation does not follow the same format, and it varies from contract to contract. Brent crude price (B), heavy fuel oil price (HFO), light fuel oil price (LFO), gas oil price (GO), coal price, electricity price and in some cases, consumer and producer price indexes are the indexation elements of price formulas.
 Price review
Usually there exists a clause allowing parties to trigger the price revision or price reopening in LNGSPAs (sale and purchase agreements). In some contracts there are two options for triggering a price revision: regular and special. Regular ones are the dates that will be agreed and defined in the LNGSPAs for the purpose of price review.
 Price convergence
- Due to small size of spot market it cannot drive price divergence.
- The LTCs pricing formulas differ significantly between EU, US and Asia. EU and US are converging to hub prices. Asian contracts are linked to JCC or ICP.
- Need to change the contract price review procedure.
- Convergence means interconnected and more complex markets.
- Are Asian buyers willing to accept unforeseeable events in Atlantic Basin to influence LNG prices in Asia?
- Asia's growing economies accept the higher natural gas prices and the link to oil. EU and US price levels (gas-on-gas) are much lower.
- Is oil indexation appropriate? What is the role of S-curve?
- Oil to gas switching technologically easy and S-curve dampens the price volatility.
 Regional Determinants
- Shale gas had set the ceiling to Henry Hub prices
- Asian LNG prices traditionally linked to crude oil - sellers market
- Asian LNG LTC prices are linked to Japanese Crude Coctail or Indonesian Crude Price
- The JCC/ICP-linked LTC pricing formula is generally accepted by buyers and sellers in Asia due to lower volatility (softened via S-curves) and tradition. General resistance to pure hub-based (gas-on-gas) contracts in Asia.
- LNG price fluctuations are smaller (than JCC) because of S-curve
 Spot market
- Reference prices determined by gas hubs: NationalBalancingPoint, TitleTransferFacility, ZeebruggeHub, NetConnectGermany, HenryHub, PEG, BEB, GTF, PSV, CEGH, MSATR, GasPool
- Long-term contract prices were historically determined by substitute fuels: oil and coal.
- Since 2009 the spot prices started diverging from LTC prices as a result of gas glut and market liberalization. See NaturalGasTrends2010.
- Industry players are considering different pricing mechanisms and a smarter link between the LTC and spot prices. The primary areas of improvement are: different indexing mechanisms and faster price review.