Western region gas traders have caused a growth spurt over thepast couple of weeks in the Kansas City Board of Trade’s WesternNatural Gas Futures Contract. The contract has developed a habit ofbreaking open interest records every few days. Open interest jumpedby more than 1,000 contracts from Wednesday to Thursday last week.Such moves at the little Midcontinent exchange may seem small whencompared to other exchanges but they have raised some eyebrows inthe gas marketplace.

It’s been two and a half years since KCBT launched the contract.It’s still a far cry from the liquidity of Henry Hub futures at theNew York Mercantile Exchange. In fact, it’s not near the level ofopen interest posted by Henry at the same point in its youth (2.5years). Open interest on the Henry Hub contract was at 69,000 andvolume was near 6,600 in September 1992. KCBT’s latest record is7,533 open interest (the number of open positions in the market)and its recent volume (the number of closed positions) hasfluctuated near 1,194. But the highest open interest level onKCBT’s 120-year-old Hard Red Winter Wheat futures is only 59,000.

In an interview with NGI last week, KCBT President Mike Braudesaid he never expected the contract would match the performance ofHenry Hub futures on Nymex. “We never thought and I still don’tthink it will ever reach the volume of the Henry Hub…” He’dprefer a comparison with Nymex’s Permian contract, which hasdelivery in the same region but has shown no signs of lifepractically from its inception.

“We always thought [KCBT’s contract] had the potential to do4,000-5,000 contracts a day [in volume], said Braude. “I think wecould easily get to 15,000-20,000 in open interest. It’s going totake time, but we’re very pleased with where it is right now.

“Late last year, we kind of saw this coming,” he added. “I thinkthat the contract now has proven that it’s here to stay and I thinka lot of people who were just kind of sitting on the sidelineswaiting to see if we would stay are now convinced we are and arebeginning to use it and use it successfully.”

In the past, the contract has been criticized for its lack ofliquidity. Traders could open a position, but it could take a whilebefore they could close out. In the meantime they would be stuckwith an unhedged cash deal.

But in a statement last week, KCBT said longtime participants inthe contract recently have been “putting on increasingly largepositions, and a number of new participants have entered the marketas well..” Jack DiCapo, an independent broker who trades on theKCBT floor on behalf of Oneok, Enron and other firms, confirmedthat. “Ever since PGandE has taken over the [Waha] hub, they’vebeen a more active player in our market,” he said. PGandE took overoperation of the Waha Hub in West Texas, the delivery point forKCBT, when it purchased Valero last spring. “PGandE has been moreactive. ONEOK out of Oklahoma has been more active. KN has beenvery active. We’ve seen others that haven’t been here before orhaven’t been here in quite a while start to be more active. Duke isactive in here.

“I don’t want to jinx it, but I think we’re getting to an areanow where there’s a lot of other people taking notice of themarket, and they’re saying ‘well, we have a legitimate market hereand we have legitimate open interest in each month, so lets give ita shot.'”

DiCapo said some of the current increase in open interest isbased on summer weather predictions. In a typical summer followinga strong El Nino winter, temperatures in the West are higher thannormal, snow pack is thinner than normal and hydroelectric power isscarce, all of which contributes to an increase in gas demand.Strong gas demand for generation in the summer could hamper storageinjections possibly leading to increased demand entering the falland winter. The theory seems to hold up judging from the relativelyhigh levels of open interest spread out over many months on theKCBT.

Another reason for the increased activity, DiCapo said, is agreater number of Waha basis deals being done in the cash marketbecause of tighter correlation between Waha and other westernpoints. “That has led to more hedging in our pit,” he said.

What could further increase activity on KCBT is legislation inthe Kansas legislature that would allow regulated state gasutilities to use KCBT futures as a hedging tool. “If that happens,you’re talking a tremendous amount more open interest in our pit.”The legislation is expected to be passed by April 1.

“This contract is truly coming into its own,” said Braude.

Rocco Canonica

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