If you’re looking for the best possible natural gas pricing, there is no one-size-fits-all solution. Because gas prices are driven by a variety of factors that result in a range of different products, you need to clearly understand how each works within the context of your business needs.

“The key market drivers on the wholesale energy side revolve around the futures market and futures contracts,” notes Jim Maddigan, Senior Natural Gas Pricing Manager at Direct Energy. “Just as futures markets exist for many commodities, there are several for energy markets, including one for natural gas. Futures contracts, based on market prices, are key instruments that offer price stability. The futures contract, which allows sellers to lock in longer-term prices, acts as a hedge against price volatility.”

Within the framework of futures markets are two different approaches to anticipating market movement: fundamental indicators and technical indicators.

• The fundamental perspective is based primarily on supply and demand. The weather, for example, will drive demand. It can also act as a threat to supply (e.g., Hurricane Katrina closing oil refineries and natural gas pipelines). Natural gas storage is another market driver. Large amounts of storage can force prices down, while a big withdrawal could raise them. A number of other factors affect supply and demand, including pipeline outages and even geopolitical situations. In short, the fundamental perspective is anything that would affect availability or reliability of physical flow from production to consumption.
• The technical perspective might be considered the opposite of the fundamental view. As opposed to existing conditions, it looks at pricing from a historical performance vantage point. “Technicians monitor moving averages and trading trends with an eye toward predictability,” says Maddigan. “They can’t tell you exactly what will happen but will tell you what’s likely to occur when certain conditions exist based on historical trends.”

Ultimately, the right pricing for your business will be driven by the pricing product that meets your needs. It all comes down to your appetite for risk. Essentially, the natural gas you buy will be the same molecules no matter where they come from--the difference, as far as pricing goes, is “who wears the risk,” Maddigan says. “If you’re willing to assume more of that risk, you’ll get a lower price. If the supplier takes it on, you’ll pay more.”

Maddigan outlines the basic types of contracts/products as follows:

• Variable pricing—The supplier works with you to help you make a good decision on when the market will trend down and you can take advantage of lower prices. Say you’re a manufacturer. You know your volume and needs, so a variable contract might help you make the most of price shifts. Converting from variable to fixed at the right time could lock in a favorable price through the end of your term.
• Fixed pricing—This offers price certainty, which helps you budget more effectively. If you operate a school or apartment building, where your volume is more affected by the weather, you might need a fixed price product.
• Volumetric swing contracts are related to daily usage changes and the wholesale gas prices paid to cover those changes. To keep supply and demand in balance, a supplier can keep deliveries and usage in check in a volatile market, as long as the cost for that anticipated volumetric risk is covered by the sales price.
• Options are financial derivatives that give the owner the right, but not the obligation, to buy or sell an underlying commodity at a specific price and time. With options—also called caps, collars and floors—you pay a premium for price protection from adverse market conditions.