IntercontinentalExchange (ICE) is betting the market will find value in trading a futures contract based upon changes in the Energy Information Administration's (EIA) weekly natural gas storage reports.
In a filing last week with the Commodity Futures Trading Commission (CFTC), ICE said it planned to launch on Nov. 11 the U.S. EIA Financial Weekly Index contract, "a cash-settled contract based on the change in the number of Bcf [billions of cubic feet] published in the" Weekly Underground Natural Gas Storage Inventory Report (WNGSR).
ICE isn't the first to offer a product based on EIA inventories. In 2004, the New York Mercantile Exchange (Nymex) and broker ICAP created an electronic auction of options on oil and gas inventory statistics promulgated by EIA. The options auctions were abandoned in 2007.
One Washington, DC-based risk manager was skeptical that the ICE contract would have broad appeal. "It's a tool that a speculator might be interested in, but you have to have an awful lot of speculators, and as much as we care about the natural gas business, it is dwarfed by the stock market and the bond market. A lot more people care about the BRICS [Brazil, Russia, India, China, South Africa] ETF [exchange traded fund] than they do the natural gas inventory number," he said.
"It's not a bad product, but from the point of view of a hedger, yes, the inventory number will have an effect on price but it's not the only thing, and I can't think of anyone who has a commercial interest solely in the inventory number, other than the Henry Hub storage operators. It's an important number, but it's just part of everything else.
"It's a problem of finding critical mass. That's always the game on every single contract on every exchange. They are all trying to be liquidity magnets and get the action. It can be a great idea but not go anywhere because the market chooses not to place their chips there."
Contract size is to be equal to $10,000 multiplied by the number of Bcf change in the WNGSR, quoted in 1 Bcf increments and with a maximum price fluctuation of $10,000, ICE said. The position limit for the contract will be 10,300 contracts, or 25% of the deliverable supply.
"Based upon the potentially large size of the contract, the exchange is setting the minimum block size at two lots, as the exchange anticipates that this is the level that [the] contract will not be filed in its entirety without major price concessions," ICE said.
Other ICE natural gas contracts trade in increments of 2,500 MMBtu. In order to determine the deliverable supply for the EIA Financial Weekly Index Future, ICE estimated the dollar value of gas held in underground storage.
"The market value based on the Nymex Natural Gas settlement price of each week's storage volume ranged from $5 billion to $16.4 billion from August 2010 to August 2013," ICE said in its CFTC filing. "The change in market value based on the same Nymex Natural Gas settlement price from week to week ranged from $3.4 million to $3.8 billion from August 2010 to August 2013."
To set deliverable supply for the contract, ICE used the average market value of the change in gas in storage ($412 million) and divided by the trading unit ($10,000) to arrive at an estimate of deliverable supply of 41,200 contracts.