Estimating market risk

Before we jump into the issues surrounding the difficulties of estimating risk within
the energy sector it is worth putting the different products into some framework with
respect to liquidity. Let us compare the volume, open interest and the term of the
forward contracts in the products traded on the NYMEX (see Table 18.1).
Table 18.1 Products traded on the NYMEX (as of 14 June 1999)
Daily volume Open interest Latest forward
(contracts) (contracts) contract
Crude oil – WTI 51 456 120 068 Dec-05
Heating oil – NY Harbor 15 228 38 815 Dec-00
Gasoline – NY Harbor 15 623 41 230 Jun-00
Natural gas – Henry Hub 23 931 67 860 May-02
Electricity – Palo Verde 121 989 Dec-00
Electricity – COB 144 1 177 Sep-00
Electricity – Cinergy 98 527 Aug-00
Electricity – Entergy 12 343 Feb-00
Electricity – PJM 9 23 Oct-99
Electricity – TVA 0 0 Sep-99
Electricity – ComEd 0 0 Sep-99
Note: The electricity contracts are relatively new: the last contract was only launched
in March 1999. It is unlikely that all the contracts will survive.
Source: NYMEX,CBOT
Given the infancy of the market, only limited liquidity exists in some of the power
products, even where the OTC market has been robust enough to launch a futures
contract. Any price data that is used must therefore be checked closely before
conclusions can be drawn. This is particularly important when looking back at a
significant period of time – many of the electricity markets simply did not exist more
than a year or so ago.