Published index prices are the mainstay of most energy commodity markets. That is certainly true of U.S. natural gas. Of all natural gas deals done in the U.S. last year, almost 80% of the total transaction volume was priced based on an index published by one or more of the industry trade publications covering U.S. gas, such as Natural Gas Intelligence, Platts and Argus. But there could be a problem brewing. For publications to compute an index price there must be enough deals reported that are NOT priced on an index - called an “outright” or “fixed” price. If all, even most deals are done at an index price, there can be no index. Does that sound a bit circular? Well it should. In today’s blog we delve into the sometimes arcane world of commodity index pricing. Arcane maybe. But with $150 million in U.S. natural gas moving each day based on index deals, it is worth understanding how all this works, and how things could go awry. Fortunately, it is possible to know quite a bit about how the U.S. natural gas market uses index transactions.
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