Looking to help market participants “manage exposure” to the impact of reported oil and natural gas storage inventories released by the Energy Information Administration (EIA) each week, the New York Mercantile Exchange Inc. (Nymex) said Wednesday it has teamed with ICAP Energy, a leading inter-dealer broker, to launch an electronic market in options on oil and gas inventory statistics.
Under the plan, the over-the-counter options will be offered through an auction process and will be cleared by Nymex. The companies said they expect to have the first natural gas inventory auction on June 2, ahead of the June 3 release of the gas storage report by the EIA. While the first oil inventory auction has not yet been scheduled, the companies noted that they expect it to occur sometime this summer.
“We see this exciting new market filling a gap in the tools available to our clients for managing energy market risks,” added ICAP CEO Dennis Crum. “Combining the exchange’s clearing capability and expertise with ICAP Energy’s distribution will create a deep liquidity pool.”
The strike units of the options will be the number of billions of cubic feet of natural gas or millions of barrels of oil that could potentially be the difference in inventory from the previous week’s report. Nymex added that the options will be 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.
The inventory statistics auctions will be held the night before, and as the market grows, an additional auction will be added on both the morning of the oil stocks and natural gas storage report releases. “The change in the inventories determines which options are in the money and which are out of the money,” the companies said. “The premium collected from those holding out-of-the-money options is paid to those holding in-the-money options.”
The auctions will be marketed to the world’s leading energy market participants including a broad range of natural gas and oil companies, institutional investors and other risk intermediaries.
This market will build on two previous implementations of a proven, patented risk-mutualization framework developed by New Jersey-based Longitude Inc. The companies reported that the method has been successfully used in auctions on economic derivatives, launched by Goldman, Sachs & Co. and Deutsche Bank in October of 2002, and mortgage prepayment derivatives launched in June of last year by Goldman Sachs, both developed in partnership with ICAP.
“We are delighted to help the New York Mercantile Exchange and ICAP build on the success of our previous auction products,” said Richard Ruzika, head of commodities at Goldman Sachs. “This is a natural extension of the existing energy markets. We expect significant interest from clients for options on these key movers of oil and gas prices and look forward to being a lead participant.”
ICAP is one of the world’s leading brokers of fixed income securities with daily average transactions well in excess of $600 billion daily, 50% of which are electronic.
Weighing in on Nymex’s announcement, a Washington, DC-based broker said the new market looks like it will be interesting. “In essence it is like ‘number insurance,'” he said. “If you’re afraid that the number is going to hurt you on a particular day, then you would use it. The storage number creates a lot of volatility, but the question will be how much do people want to pay for it. From a trader’s perspective, it’s definitely something new to look at.
“To my mind, what is much more interesting are the basis trades and the basis contracts, which are really starting to go,” he said. “Lord knows there are enough gamblers in this industry, and giving them something else to bet on is like adding Keno. We only had poker and roulette before, now you have a new game to bet!”
Nymex began clearing the 25 most popular over-the-counter traded energy basis swaps in May of 2002 and by all indications the move has been a success. In total Nymex’s ClearPort trading and clearing system, which handles clearing for the exchange’s natural gas basis contracts and the financially settled Henry Hub natural gas swaps, tallied an impressive 7.1 Tcf trading volume in natural gas alone during its first year of existence.
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