NYMEX Energy Markets

Bradford G. LeachSenior Director, Electricity and

Natural Gas ResearchNYMEX

USAEE/IAEEJuly 9, 2004

NYMEX Defined

• Demutualized For-Profit Corporation• 816 Shares with Trading Rights• Two Divisions: NYMEX and COMEX• Open Outcry Floor Trading• Web-Based Clearing and Trading• Regulated by Commodity Futures Trading

Commission

Primary Economic Functions of the Commodity Exchanges

Price DiscoveryPrices are determined:

• in a transparent, competitive market• by market participants ( not the Exchange )• and disseminated throughout the world

instantaneously

Hedging FunctionPrice risk is shifted to parties with an inverse risk profile

Why Use NYMEX Futures & Options?

• Volatility of the underlying commodities

• Liquidity of NYMEX traded contracts

• Safety of Exchange traded instruments

• Electronic trading extends the normal trading day to 23 hours

Total Volume of NYMEX Traded Contracts

020,000,00040,000,00060,000,00080,000,000

100,000,000120,000,000140,000,000160,000,000

1996 1997 1998 1999 2000 2001 2002 2003

Con

trac

ts

Futures Options

Energy Market Credit Developments

Continued Financial Weakness of Merchant Sector

Dramatic Increase in Credit Risk Recognition

Significant Reduction in Leverage and Liquidity of Market Participants

More Demanding Financial Statement Reviews with Rating Changes

NYMEX Clearporttm

• Web-Based Platform for Trading and Clearing NYMEX Contracts

• OTC Market Use of NYMEX Clearing Protections• Launched 5/31/02• Total 2004 Volume: 5,086,810 • Increase of 77% from 2003• 30 NG Basis Contracts• 20 CL and Products Contracts• 13 Electricity Contracts

NYMEX Natural Gas and Electricity Contracts

• Product Trade Date• Natural Gas 1990• COB Electricity 1996• Palo Verde Electricity 1996• Cinergy Electricity 1998• Entergy Electricity 1998• PJM Electricity 1999• Mid-Columbia Electricity 2000• Cleared Palo, Mid-C, PJM 2002• Natural Gas Basis Contracts 2002• NYISO Zones A, G, J 2002• PJM Monthly Financial 2003• Additional Natural Gas Basis Contracts 2003 • PJM Daily and Weekly Financial: 2003 • Dow Jones Western Electricity Contracts 2004

NYMEX PJM: Monthly, Weekly, and Daily

0

200

400

600

800

1000

1200

1400

1600

2/5/04

2/12/0

42/1

9/04

2/26/0

43/4

/043/1

1/04

3/18/0

43/2

5/04

4/1/04

4/8/04

4/15/0

44/2

2/04

4/29/0

45/6

/045/1

3/04

5/20/0

45/2

7/04

6/3/04

6/10/0

46/1

7/04

6/24/0

47/1

/04

20-Day Daily20-Day Weekly 20-Day Monthly

NYMEX PJM Monthly Floor Volume

0

100

200

300

400

500

600

700

800

900

1000

11/1

0/03

11/1

7/03

11/2

4/03

12/1

/03

12/8

/03

12/1

5/03

12/2

2/03

12/2

9/03

1/5/

04

1/12

/04

1/19

/04

1/26

/04

2/2/

04

2/9/

04

2/16

/04

2/23

/04

3/1/

04

3/8/

04

3/15

/04

3/22

/04

3/29

/04

4/5/

04

4/12

/04

4/19

/04

4/26

/04

5/3/

04

5/10

/04

5/17

/04

5/24

/04

5/31

/04

6/7/

04

6/14

/04

PJM FL10-Day

Comparative Historical Volatility7/6/04

• Volatility 10-Day 30-Day 50-Day 100-Day• Natural Gas 25% 32% 34% 31%• Crude 43% 44% 38% 32%• Unleaded Gasoline 51% 46% 39% 34%• Heating Oil 51% 48% 41% 35%• Fed Funds 15% 27% 34% 34%• 10Year Treasury 7% 7% 7% 7%• EuroDollar 3-Mo 30% 36% 42% 46%• S&P500 10% 11% 11% 12%• Gold 18% 16% 18% 18%• Silver 40% 34% 39% 42%• Live Cattle 29% 23% 21% 17%• Yen 10% 12% 13% 12%• PJM Monthly 15% 24% 22% 22%

NYMEX Open Interest6/30/04

• Commodity 6/03 6/04 Chg• Heating Oil 118,211 181,680 54%• Unleaded Gas 84,200 130,412 55%• Crude Oil 503,506 698,380 39%• Natural Gas 347,864 363,947 5%• PJM Monthly 5,073 32,065 532%• NYISO A 7,728 17,251 123%• NYISO G 10,298 11,509 12%• NYISO J 2,481 4,411 78%

• Total Floor 1,060,106 1,408,246 33%• Total ClearPorttm 824,777 1,693,082 105%

NYMEX Natural Gas Annual Volumes

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

1996 1997 1998 1999 2000 2001 2002 2003 2004

NOTE: 04 volume thru June

Con

trac

ts

Futures Options

U.S. Natural Gas Sector ConsumptionSource: Energy Information Administration

20003000400050006000700080009000

1997 1998 1999 2000 2001 2002

BC

F

Residential Commercial Industrial Electric Power

-18%

+40%

Gulf Of Mexico Gas Decline

0%

10%

20%

30%

40%

50%

60%

1970

-7119

72-73

1974

-7519

76-77

1978

-7919

80-81

1982

-8319

84-85

1986

-8719

88-89

1990

-9119

92-93

1994

-95 1996

1997

1998

1999

Wells Completed During Time Period

Effe

ctiv

e D

eclin

e R

ate,

%/y

r

SOURCE: Simmons & Company International

Total United States Natural Gas Imports

SOURCE : Energy Information Administration, DOE

0500,000

1,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,0004,500,000

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Mill

ion

Cub

ic F

eet (

MM

cf)

U.S. Exports to Mexico

0

100

200

300

400

500

600

700

800

900

1000

1Q97 3Q97 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02

Mex

ico

- Net

Impo

rts, m

mcf

/day

SOURCE: Simmons & Company International

EIA: United States Natural Gas Storage Report Historical Comparison

0

500

1,000

1,500

2,000

2,500

3,000

3,500

week 1

week 8

week 1

5wee

k 22

week 2

9wee

k 36

week 4

3wee

k 50

week 4

week 1

1wee

k 18

week 2

5wee

k 32

week 3

9wee

k 46

Bill

ion

Cub

ic F

eet (

Bcf

)

5-year Avg. (98-02)2003-04

NYMEX Natural Gas Front Month Settlement Prices (1997 - Present)

$1.00$2.00$3.00$4.00$5.00$6.00$7.00$8.00$9.00

$10.001/

4/99

4/4/

997/

4/99

10/4

/99

1/4/

004/

4/00

7/4/

0010

/4/0

01/

4/01

4/4/

017/

4/01

10/4

/01

1/4/

024/

4/02

7/4/

0210

/4/0

21/

4/03

4/4/

037/

4/03

10/4

/03

1/4/

044/

4/04

US

$$/ M

MB

tu

NYMEX Natural Gas Futures 12 Month Strips

$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00$5.50$6.00$6.50$7.00$7.50$8.00

April June August October December February

Contract Month

Pric

e

3/2/98 3/1/99 3/1/00 3/1/01 3/1/02 3/3/03 3/1/04

March 2001: $5.313March 2002: $2.792March 2003: $5.749March 2004: $5.758

NYMEX NATURAL GAS FUTURES 12 MONTH STRIP PRICES

2.0002.5003.0003.5004.0004.5005.0005.5006.0006.5007.000

Jul

Aug Se

p

Oct

Nov Dec Jan

Feb

Mar

Apr

May Jun

$/M

MBt

u

6/9/04 6/9/03 6/10/02

PJM Front Month:30-Day Volatility(08/13/2003~07/02/2004)

0%

5%

10%

15%

20%

25%

30%

8/13/03 10/13/03 12/13/03 2/13/04 4/13/04 6/13/04

PJM

NYISO Front Month:30-Day Volitility(08/13/2003~07/02/2004)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

8/13/03 10/13/03 12/13/03 2/13/04 4/13/04 6/13/04

NYISO ANYISO GNYISO J

Natural Gas v.s. Crude Oil Front month:30-Day Volatility

(04/04/2002~07/02/2004)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

4/4/02 7/4/02 10/4/02 1/4/03 4/4/03 7/4/03 10/4/03 1/4/04 4/4/04 7/4/04

Crude OilNatural Gas

Date Price Return06/14/04 56.50$ 06/15/04 58.25$ 0.030506/16/04 60.25$ 0.033806/17/04 60.50$ 0.004106/18/04 59.50$ -0.016706/21/04 59.00$ -0.008406/22/04 59.50$ 0.008406/23/04 59.50$ 0.000006/24/04 59.25$ -0.004206/25/04 58.00$ -0.021306/28/04 56.50$ -0.026206/29/04 54.50$ -0.036006/30/04 55.25$ 0.013707/01/04 55.00$ -0.004507/02/04 55.00$ 0.0000

NYMEX Dow Jones Mid-Columbia Electricity Price

Index Swap Contract10-Day Volatility

30.719%29.250%24.034%26.429%26.252%26.671%

Date Price Return 10-Day Volatility06/09/04 69.75$ 06/10/04 71.63$ 0.026606/14/04 71.50$ -0.001806/15/04 72.50$ 0.013906/16/04 73.50$ 0.013706/17/04 73.25$ -0.003406/18/04 71.75$ -0.020706/21/04 70.00$ -0.024706/22/04 70.00$ 0.000006/23/04 69.75$ -0.0036 26.46%06/24/04 69.75$ 0.0000 21.08%06/25/04 69.25$ -0.0072 21.19%06/28/04 66.75$ -0.0368 24.82%06/29/04 64.50$ -0.0343 23.82%06/30/04 65.50$ 0.0154 28.37%07/01/04 63.75$ -0.0271 29.18%07/02/04 63.75$ 0.0000 29.02%

NYMEX Dow Jones NP15 Electricity Price Index Swap

Future Developments

• NG Swing Swaps• Off-Peak Electricity Swaps• NI Hub Futures• ISO-NE Futures• ERCOT Futures• MISO Futures• Emissions Contracts