Maureen Lorenzetti
The New York Mercantile Exchange, UK-based broker ICAP Energy LLC, and Goldman Sachs June 2 launched an electronic market for options pegged to weekly US Energy Information Administration gas storage numbers. A similar over-the-counter (OTC) product for oil inventories is expected this summer.
Auction partners say their OTC product will help build liquidity in a credit-strapped merchant energy market still reeling from the Enron Corp. bankruptcy. But analysts and producers aren't sure yet if these new derivatives can help fix the problem.
Market participants
ICAP won't say who participated in the inaugural auction; it did say, however, that more than 100 interested parties watched online. Current players are now mostly hedge funds and speculators but producers and storage operators are interested and might get involved shortly, auction supporters say.
OTC proponents see their product as an important new source of liquidity for what is now the "quiet period" prior to when EIA releases numbers; that translates into better risk management, they say.
The Natural Gas Supply Association has a wait-and-see attitude. "If the service is worthy, the market will tell us. The converse is also true. We don't know the effect of such services on natural gas prices. We will all be watching to see how the market responds," said NGSA Pres. Skip Horvath.
Mixed reactions
With Enron's ghost still haunting energy marketers, analysts gave mixed reactions to the EIA options, a response auction partners say is unwarranted.
Robert Weiner, a George Washington University business professor, calls the auction "a speculative sideshow at best." He said that oil and gas price derivatives are already widely used and "surprises in inventory levels create risk only through contribution to unanticipated price changes."
EIA understands that the market moves on their numbers already. Still, some veteran agency statisticians worry unexpected data revisions could stir up volatility unnecessarily. Another concern is lucrative auctions may boost the possibility EIA numbers could be leaked or fixed.
Auction partners counter that manipulating numbers is already a criminal offense, and recent Commodity Futures Trading Commission investigations should help build overall confidence in the reporting process.
Ron Denhardt, of Amherst, Mass.-based Strategic Energy & Economic Research Inc. said the options could help a trader reverse a large futures position following a surprise result in the weekly EIA data. Also, if liquidity is sufficient, the options could serve as a good gauge of market expectations in addition to the various private surveys news organizations conduct. But Denhardt questions how options will be priced and whether just speculators will use them.
Auction supporters counter that like other economic derivatives, the earliest market participants are generally speculators, creating liquidity for hedgers to join later. With EIA options, however, they indicate more of the early interest is from traditional energy market participants who are working through new internal product approval processes. Further, EIA options are "completely transparent with pricing based completely on relative demand."
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