Going into its seventh week of operation, the derivatives auction based on the EIA’s weekly natural gas storage report continues to grow, its sponsors say. Launched by ICAP Energy, Goldman Sachs and Nymex in early June, the electronic options auction looks to help market participants “manage exposure” to the impact of reported natural gas storage inventories released by the Energy Information Administration (EIA) each week (see Daily GPI, April 29).
“The number of participants and the number of dollars placed in orders every week has increased steadily at a rate that we are extremely happy with,” said Chris Edmonds, a senior vice president with ICAP. “We think that will continue to grow. We continue to add counterparties every week and the interest level is absolutely there.”
The over-the-counter options are offered through an auction process and are cleared by Nymex. The strike units of the options are the number of billions of cubic feet of natural gas that could potentially be the difference in inventory from the previous week’s report. The options are traded through an auction format in which the options prices are based solely on the relative demand of participants — the more popular the strike, the greater its value.
Indicative prices on where the auction will open this week is set at 84.9940 Bcf. The auction runs from 3-4 p.m. (ET) on Wednesday, the day before EIA announces the net amount injected or withdrawn from storage during the previous week.. This week “the range basically is centered around 85 Bcf, with five strikes above and five strikes below in 5 Bcf increments,” Edmonds said. “The range itself is a total of 50 Bcf, with 25 Bcf above and 25 Bcf below what is deemed to be the market consensus.”
Edmonds said that ICAP takes several different inputs from the industry through publicly available surveys and forecasts and makes a judgement call on the industry consensus. At 3 p.m. Wednesday when the auction goes live, that number will change based on the amount of order flow at the different strike prices within the auction range.
For something to be “in the money,” Edmonds said something is either going to be a better value or lesser value based on a distribution curve located online at www.eiadprices.com. During the auctions run time, the distribution curve and the correlation to price will shift as orders come in.
“People are not only excited about what is here, but they also have expressed a great deal of excitement about what we will have with the ‘end of season’ options forthcoming shortly, as well as something for crude versus the DOE release. Something for crude is expected to come out sometime in the fall and then obviously the longer-dated storage options would follow after that.”
While there is only one current natural gas storage auction, Edmonds said they expect to roll out a second auction in the near future which would take place on Thursday mornings before the EIA makes its announcement.
Goldman Sachs provides the initial liquidity to the marketplace and that provision of initial liquidity actually sets what the opening prices are. “As soon as the first outside dollar goes in, all of that is then recalculated,” he explained.
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