Gearóid Lane

The Weather Risk Management Association's Gearóid Lane talks to Oliver Holtaway about the bright prospects for managing weather risk

The US natural gas market has undergone major changes in recent years. After several decades of rigid regulation, the natural gas industry is currently free to compete on the wholesale level and, in a growing number of regions in the US, at the retail level. The result has been a considerable increase in the production of natural gas, sweeping changes in the structure of the industry, and the growth of a fluid market in natural gas futures and options to cope with pricing uncertainties. One outcome of this development is the rise of a new class of participants in the industry called marketers.1 Deregulation of the gas industry has also raised the profile of processors who position themselves between the producers and the pipelines by making the gas suitable for shipment by pipeline.2 The natural gas processor can partially hedge the price risk of processing natural gas and extracting propane through the use of a fractional spread (henceforth, 'frac spread') much the same way refiners use crack spreads to establish margins when refining crude oil into heating oil and gasoline. However, the success of the processor in protecting or securing a desired margin hinges crucially on whether or not natural and propane prices are cointegrated or reliably linked in the long run.