Kansas City Board of Trade to Launch Natural Gas Futures Contract
NEW YORK (AP) _ The Kansas City Board of Trade will begin trading natural gas futures contracts next Tuesday, in a bid to pick off some business from its much larger competitor, the New York Mercantile Exchange.
Currently, the Nymex is the only exchange in the world that deals in natural-gas futures contracts. The International Petroleum Exchange in London is considering establishing a natural gas contract, but has not done so.
The Kansas City contract is aimed primarily at buyers in the Western United States who want to take advantage of a West Texas delivery site.
``Delivery for Nymex is in Louisiana,″ Michael Braude, the Kansas board’s president, said in an interview. ``That’s still a long way from the West Coast.″
In setting up the contract, the KCBT hopes to exploit differences in natural gas prices in different parts of the country. It will trade contracts based on delivery to Waha, Texas, located in the Permian Basin in West Texas.
By contrast, Nymex natural gas futures trade for delivery in Erath, Louisiana, hundreds of miles to the east.
Buyers and sellers of futures contracts rarely take delivery of the physical product. But they price the contract as if they were going to, factoring transportation costs, weather, and supply and demand differences.
``If... you’re in, say, California, the fundamentals that drive your cash prices aren’t always reflected in the Nymex price,″ said Mark Prout, vice president of market development at the Kansas City Board of Trade.
``Nymex trades on Gulf Coast supply serving Northeast demand, and if you’re in the Western U.S. it’s not always as hot or cold as it is in New York, or vice versa.″
Jerry Brown, who designs energy hedging strategies for clients at Prudential Securities in Denver, said he plans to use the KCBT contract.
Brown said that on Thursday, he could buy natural gas futures in Denver through the Nymex system, for 41 cents per million British thermal units. The price would be less than half that, or 19 cents, if it were traded in Kansas City, Brown said.
The KCBT does not expect to make a serious dent in Nymex’s natural gas business, at least for now.
The Nymex, which declined to comment on the KCBT’s plans, currently trades just under 30,000 natural gas futures contracts per day. Prout said that, in contrast, the KCBT would be ``extremely happy with 5,000 a day. Our threshold of success is much more modest, but quite a few people in the business have said that’s low.″