Our commodity prices are based on the two nearest futures contracts, for example May and June. When transitioning from May to June, our price will align closely with the May contract at the start of May. By mid-May, the price is split 50-50 between May and June. At the end of May the price is fully based on the June futures.
How our system works
- The nearest expiring contract (known as the ‘front contract’) is 'A'.
- The second nearest (known as the ‘back contract) is 'B'.
- The price moves from 'A' to 'B' as 'A' expires. When 'A' expires, 'B' becomes the new 'A', and a new 'B' is selected. This ensures smooth transitions between contracts.
Pricing transition
During a transition, our price is 100% based on the front contract 'A' and gradually moves towards the back contract 'B'.
Detailed example of the overnight adjustment calculation for Natural Gas
Note: This example uses prices at the start of the July and August contracts. Rates change based on the price differences between the front and back futures contracts.
To calculate the overnight adjustment for Natural Gas, we consider the daily price adjustment (DPA), and the admin fee (AF).
Overnight adjustment = DPA% + AF%
The admin fee is calculated as:
Price x contracts x 0.01096%
The daily price adjustment (DPA) is calculated as:
(B - A) / (T2 - T1) x 1 / A x 100
Where:
- T1 is the previous expiry date (27/05/24)
- T2 is the current expiry date (24/06/24)
- A is the price of the front future
- B is the price of the back future
In this case, T2 - T1 gives 28 days.
Example data
(Source: Bloomberg)
| Date | Natural Gas |
Front month (A) Jul (NGN24) |
Back month (B) Aug (NGQ24) |
|---|---|---|---|
| 27/05/24 | 2.744 | 2.744 | 2.791 |
Calculation for 100 long contracts at a price of 2.744:
- Daily premium adjustment (DPA):
DPA = (2.791 - 2.744) / 28 x 1 / 2.744 x 100 = 0.0612%
- Admin fee:
Charge = 0.01096%
- Total overnight adjustment:
Overnight adjustment = 0.0612% + 0.01096% = 0.0722%
The cost to hold a long position overnight would therefore be 0.0722%, comprising the daily premium adjustment and the admin fee. If you were short Natural Gas, you would receive 0.0612% and pay 0.01096%, resulting in a net credit of 0.0502%.
Therefore for a long position of 100 contracts (Thermals) in Natural Gas we calculate as follows:
Size x price x total overnight adjustment
= 100 x 2.744 x -0.0722% = -$0.20
Of which:
Daily premium adjustment
= 100 x 2.744 x -0.0612% = -$0.17
Admin fee
= 100 x 2.744 x -0.01096% = -$0.03
These percentages represent the daily cost or credit for holding a Natural Gas position overnight, based on the example data. The rates will fluctuate as the prices of the two contracts converge or diverge.
We hope this explainer was useful. If you have any further questions about our pricing, please get in touch and we’ll be happy to assist.