Tuesday, June 27, 2017

Natural Gas Price Settlement Date

Natural gas contracts and pricing are pretty complicated but here is my take on something royalty owners should be aware of regarding how pricing affects them month to month.

Many mineral owners / royalty owners are paid royalties on natural gas wells, or oil wells that also produce natural gas. And many have the erroneous perception, or assumption, that the wildly fluctuating natural gas futures price is cause for great angst. In large part, I don't think it really works that way. Natural gas futures prices indirectly affect the natural gas settlement price which is posted before the first of each month. What is the settlement price?

Royalty owners are usually paid based on one price for the entire month, and most natural gas contracts that their oil well or gas well operator is subject to are based on the settlement price which was set for the subject month. I don't know who makes the settlement price... some Grand Wizard Of Natural Gas... but it's posted online on various websites.

When is the natural gas settlement price posted? Answer -- it is posted upon the close of the market on the third business day before the first of the next month. So, for the July 2017 settlement price, for example, it will be posted in the afternoon of Wednesday, June 28, 2017. 

Once a settlement price is posted, you can quit worrying about the volatility of prices for almost a whole month. All the futures price does is give you heartburn. Although, as mentioned, futures price trends do affect future settlement prices. But if price goes down a lot early in the month, there's a chance it could rise back up before month's end. Usually, the settlement price will be pretty close to the futures price at the end of the month; although, I have seen it be several percent lower, to my chagrin!

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