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A Producers Perspective on Futures Trading

Shelley Hurley, Natural Gas Marketing and Transportation (1991)

Since April 3, 1990, buyers and sellers of natural gas have been afforded the opportunity to utilize the natural gas futures contract to reduce their firm's exposure to price risk. ARCO Gas, as the marketer of ARCO Oil and Gas Company's 1.9 Bcf/Day of production, in addition to third party supplies, accepts the price risk inherent in the spot and term natural gas markets. Because price risk exposure is an integral part of our day to day operations, ARCO Gas welcomed the NYMEX natural gas futures contract as a means to mitigate exposure to price uncertainty and volatility. Since May 1, 1990, ARCO Gas has been developing risk management and hedging strategies incorporating the NYMEX natural gas futures contract.

Spot Market Price Discovery

With the advent of the spot market in the natural gas industry in the late 1980's, a majority of the natural gas bought and sold was traded during bid week under one month contracts. Prior to April 3, 1990, the price discovery mechanism was tedious at best, and, at worst, short-term. Price discovery was based upon nearby supply and demand considerations with a strong bias towards market psychology. Price discovery was a mysterious number published in industry publications days after the bid week process was completed. A week after trading was completed, buyers and sellers could begin to measure profitability. Price discovery w