Residential and commercial natural gas consumption is sensitive to both contemporaneous and forecasted weather. So natural gas traders are able to more effectively hedge their exposure to clients during the heating season – November to March - because the new contract is referenced on a novel index that integrates forecasted natural gas consumption, in addition to the current level of consumption. “It’s more of a hedge for volumetric risk rather than price risk,” said Jeff Wang, product development manager in weather risk management at Reliant Energy.
The underlying index is calibrated to 100, representing a typical week during the heating season. So in a week that gas usage is 50% higher than on average, the WGLI would be at the 150 level. “The WGLI swap is weekly, so it’s more flexible and easier to manage position risk,” said Wang. “The new index also gives pricing transparency,” he added.
Reliant will begin making markets in the new swap contract on November 26.