The natural gas futures market is a marketplace where standardized contracts for the future delivery of set natural gas volumes are traded. Most natural gas futures are bought and sold in the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE).

Futures contracts allow participants to manage their exposure to market volatility by locking in a price today for a future purchase or a future sale of a physical commodity.

Natural gas futures contracts settle both physically and financially. Although other commodity futures might only have a financial obligation, this marketplace also bears the responsibility of physical delivery. A buyer must agree to receive natural gas at a future date at a specified location for a predetermined price, while a seller agrees to deliver the natural gas under these terms. However, less than 2% of NYMEX contracts are physically delivered.

Why do people trade natural gas futures contracts?
The first natural gas futures contracts began trading at NYMEX in 1990, allowing producers, consumers, and financial traders to hedge against price volatility at the Henry Hub in Louisiana. Natural gas producers face uncertainty over their future revenue from sales, so they may sell a futures contract now to lock in a natural gas sales price for a future date. Similarly, natural gas consumers may buy futures contracts now to lock in a price for delivery at a time when they anticipate the price may be higher. Additionally, financial traders who typically do not have any direct interest in buying or selling natural gas also buy or sell futures contracts to gain financial exposure to commodities, to diversify financial portfolios, or for other reasons.

What are some common futures market pricing dynamics?
Futures traded for the month immediately following the current month are referred to as front-month contracts, or Contract 1 futures. E.g on 30 July, August 2024 is the front-month contract. Natural gas futures contracts expire about 3–5 business days before the start of the front month.

The futures market forward curve displays the closing prices of linked individual monthly contracts across various months into the future. If futures prices increase over time compared with the current price, the market is referred to as being in a state of contango.

Conversely, the market is said to be in a state of backwardation when future prices are lower than the current price.

A commodity futures market showing backwardation suggests tighter supply or stronger demand today relative to the future. Market participants can be willing to pay a higher price for near-term delivery instead of waiting to pay a lower price for delivery in the future.

Many commodities have a natural contango to their futures curve with prices for longer-dated contracts being higher than for those closer to delivery. This futures curve represents both storage costs and the costs of capital associated with tying up funds in advance of delivery.

The shape of the forward curve is also contingent on its starting point. If today’s prices are atypically high or low, the resulting curve will be comparably steeper going forward in contracts. Increased natural gas demand or reduced supply in the short term can cause large changes in natural gas prices, especially during the wintertime.