The CME Group, which owns the New York Mercantile Exchange (NYMEX) reports that more than 150,000 natural gas trades are made daily across its system. Whether through the traditional open outcry or through its electronic exchange system, CME brings together all the wholesale buyers and sellers of natural gas in North America. This exchange allows major natural gas suppliers like CenterPoint Energy Services (CES) to purchase large blocks of NYMEX natural gas futures on behalf of its commercial, industrial and wholesale customers. Through this process, CES provides each of its individual customers a means to lock in natural gas prices – at specific volumes and for up to several years out – in order to accommodate budget certainty or to hedge against future price spikes. Technology has completely changed the way suppliers like CES operate in the natural gas market. The article below looks at the history of NYMEX natural gas futures – from the very first trade to the thousands of trades today.

NYMEX traders look back on 20 years of change

When the Henry Hub gas futures contract debuted on NYMEX in April 1990, Cindy Wexler jumped at the chance to trade. In her 20s at the time and with three years of NYMEX clerking experience for an oil trader under her belt, Wexler said the new contract gave her the opportunity to break into the coveted trading pit. NYMEX helped by selling 10 permits for $5,000 that allowed participants to trade just gas for two years, rather than buy or lease a costly seat on the exchange, she said.

Two decades later — as the NYMEX gas futures contract marked its 20th anniversary in April — Wexler still trades in the fading New York trading pit several times a week. “It was a good way to start,” she said. “The young traders didn’t have a lot of overhead. It was a good way to learn.”

In the beginning, gas trading was slow. “There would be sporadic trades,” she reminisced. “They would come in and then we’d wait around. We’d do crossword puzzles.” The first day the pit traded a total of 100 lots, Wexler said gas traders celebrated.

Ed Kennedy, vice president of energy trading at Hencorp Becstone Futures, said NYMEX, as it does with all new contracts, went around the ring the first day and told locals — or traders who trade for their own account and provide liquidity to the market — they would trade a certain amount of contracts to get the liquidity going. At that time, gas was considered an ugly stepsister and all the “real traders” were trading crude oil, he said. “Consequently, when they started trading natural gas the thing you noticed was how nice everybody was,” Kennedy said. “All the egos were trading crude.”

“At the beginning, they had just deregulated the [natural gas] market, and nobody knew what to do with it yet,” Wexler said. “They were sticking their toe in there.” Kennedy said that for the first five years end-users would not use the contract, and that limited liquidity and volume. “It was mainly marketers and producers, who were familiar with crude oil techniques,” he said. But even for experienced oil traders, gas was a different entity, Kennedy said. “We noticed it was more like wheat,” he said, adding that like the wheat season, gas’ demand season was in the winter and summer with shoulder seasons in-between. Volatility studies later confirmed that hunch, he said.

The NYMEX gas contract is now the national price benchmark for gas and is the second-highest-volume futures contract in the world, according to NYMEX parent CME Group, with trading on average year to date more than 226,000 contracts a day. (Note: one contract is equal to 10,000 MMBtu).

‘No one had heard of Henry Hub’

But it was not an easy sale at first, said Ben Schlesinger, president of Benjamin Schlesinger & Associates. Schlesinger, who was involved with designing the contract from the beginning, said proponents of the contract faced considerable opposition from those who did not believe a gas contract would fly. But Schlesinger said he and others understood there was a growing need for a futures market since the gas cash market was developing briskly. Schlesinger was part of the NYMEX gas committee that formed in 1984 to help design the contract. The first decision the committee tackled was the delivery point. The first choice was Katy, Texas, but it fell out of favor because of the difficulty of dealing with its four owners, he said.

By 1989, spot markets were growing rapidly across the nation and the NYMEX gas committee realized it no longer had to deal with Katy, Schlesinger said. Likewise, they no longer felt they needed to be in Texas, so in 1989 NYMEX filed a justification analysis for Henry Hub, located near Erath, La. “No one had heard of Henry Hub,” he said. “In the year leading up to the contract, we were having to deal with many people who didn’t think it would work.”

In the end, Henry Hub became the benchmark delivery point and now boasts 13 intrastate and interstate gas pipeline systems. Twenty years later, the Henry Hub contract is largely used as a financial hedge and few take delivery, Schlesinger said, explaining that mid-month, those who have contracts are required to show proof of transportation to take delivery or their contracts are liquidated. “It’s a gentle game to prevent physical delivery from taking place.”

On April 3, 1990 — five years after deregulation — NYMEX officially launched the June gas futures contract. The contract settled that day at $1.635/MMBtu with 925 contracts traded. Wexler said in the beginning price movements were small, with a range of just three to four cents. “We used to have [daily limits] of 10 cents only,” she said. “That was the biggest range we had.” Eventually, as volume increased, NYMEX had to boost that limit since traders would be stuck at trading limits for days, she said.

Today, the daily limit on NYMEX gas is $3/MMBtu with a five-minute breather before trading resumes. After the break, the contract is limited to an additional $3/MMBtu move in either direction. With time has also come maturity in the marketplace. Where gas once took a back seat to crude oil, it is now the fuel of the future, Kennedy said. And while end-users were once skeptical of using the contract, now all but the smallest end-users use the contract to hedge, he said. Other market participants have also joined in, with hedge funds, index funds and institutional investors using the contract as part of their investment portfolios.

Wexler said exchange-traded funds have also generated much of the increase in trading volumes. CME, which acquired NYMEX in 2008, said the Henry Hub contract has also spurred development of numerous other trading instruments. “There are now more than 160 natural gas contracts offered by NYMEX that are traded via open outcry, electronically on CME Globex, or off-exchange (for clearing through CME ClearPort),” the exchange said. Wexler, who trades two or three days in the pit and the remaining days on Globex at home, said she still prefers open outcry to the computer. “There’s more opportunity there,” she said. “It’s more exciting.”

— Cheryl Buchta, Platts 

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