Erroneous Storage Report, Price Spike Spurs Calls for Daily Reporting
The Energy Information Administration (EIA) revised its pre-Thanksgiving storage report last week from the unexpectedly large 49 Bcf withdrawal to 17 Bcf, but consumers will pay throughout the month of December for the futures price spike engendered by the erroneous report -- up to a billion dollars by some accounts -- and industrial, chemical and municipal customers are calling for changes in storage reporting.
EIA said last Thursday the erroneous report on Nov. 24 was caused by inaccuracies in submissions to its survey by one or more participants, which were subsequently corrected. It confirmed views expressed all along by traders that the report couldn't have been right, based on the degree days for that week.
The consumer groups immediately called on the Federal Energy Regulatory Commission to follow through on its proposal (AD04-10) to require daily storage reporting and for reforms of the natural gas trading rules on the New York Mercantile Exchange (Nymex).
The announcement of a 49 Bcf withdrawal on the Wednesday before Thanksgiving Day vastly exceeded expectations and sent the December futures contract up $1.40 in the few hours left before it closed. The December contract expired at $7.976/MMBtu, up $1.183 from the previous day's close, with a high for the day of $8.200.
In its latest report last Thursday, EIA revised the previous week's withdrawal figure to 17 Bcf, saying a company or companies had submitted erroneous data and subsequently sent in a correction.
"We certainly don't take anything that we do lightly," EIA spokesman Jonathan Cogan told NGI. "We know that it has impacts. We're well aware of that. We do have edit checks, and we are constantly emphasizing the importance of accurate data submissions to the respondents.
"This revision was due to a resubmission of data that we received," he said. "Because of confidentiality of all of our survey data we can't tell you more than [that]."
There were market rumors circulating that the erroneous data was submitted to EIA by ANR Pipeline, but ANR spokeswoman Kim Wallace denied that. She said ANR's data was correct despite several reports to the contrary by a Dow Jones reporter. Columbia Gas spokesman Karl Brack confirmed that Columbia, one of the largest gas storage operators in the nation, also submitted correct information to EIA for the week.
"We're always trying to do better, but we have to rely on our respondents to accurately submit the data," said Cogan. "We don't blindly accept it. We do follow up on any anomalies that appear and we're trying to improve in that area as well. The estimates that we had for that time period were within the normal range for this time of year. Obviously the market expectations were different than our number."
A big part of the reason that natural gas futures responded so significantly was that the storage report was released on the last day of trading for the December futures contract -- just hours before the contract closed. It was put out on the market during the most volatile trading day of the month. In addition, monthly contracts for physical gas are indexed to the Nymex expiration, which meant that the $1.18 last day spike rippled through a large part of the market for December.
The storage report was issued a day early -- on Wednesday rather than on Thursday because of the Thanksgiving Holiday. Although, EIA has the flexibility to change the day and the time of the release if necessary and certainly could have reported storage after the expiration of December futures, the agency has come under pressure from Nymex in the past to release its storage survey during regular open outcry trading hours so that the market can react to it.
"We do have the flexibility -- on weeks when there are holidays that would affect our normal schedule -- to determine on a case-by-case basis what day and time is chosen [for the storage data release]," Cogan noted. "We'll certainly take into consideration what we learned as we go along."
The Industrial Energy Consumers of America (IECA) issued a press statement coinciding with the release of the storage correction last Thursday, calling on the Federal Energy Regulatory Commission to expedite the implementation of daily reporting of natural gas storage information in light of the extreme price run-up last week. They were joined by the American Public Gas Association (APGA) a day later.
"The events of Wednesday, Nov. 24...illustrate the importance of accurate and timely market data when the price of natural gas increased $1.25/MMBtu or 17.4% in the 90 minutes following the release of the weekly inventory report" by EIA, wrote IECA Executive Director Paul N. Cicio in a letter to FERC Chairman Pat Wood and other Commission members.
The Nov. 24 run-up "significantly influenced" the price for December physical deliveries of approximately 73 Bcf/d of gas, which could cost gas consumers as much as $1 billion in higher gas prices, he said. Peter R. Huntsman, president and CEO of Huntsman Chemical, took the opportunity to again fault what he believes are lax trading rules on Nymex for gas, saying they cost consumer hundreds of millions of dollars during the Thanksgiving week because they failed to prevent the price spikes.
"According to financial news wires, the principal cause for the price run-up was 'hedge fund managers and other large speculators' trying to cover their trading positions. If the Nymex had meaningful trading limits in place, this like other devastating spikes in the past would not have occurred," even in the midst of an erroneous storage report, he said.
"It has been clear for some time to all concerned that the EIA weekly report drives the market each week in an irrational fashion," APGA said in calling for "prompt Commission action to take all reasonable steps to reduce the unwarranted price volatility." Requiring daily reporting as proposed in the Federal Energy Regulatory Commission's docket AD04-10 "should both reduce the likelihood of significant errors creeping into the weekly report and put a perspective on the weekly report that is currently missing."
While it "suspects and inadvertent error is the culprit," APGA strongly urges that the "appropriate parties review the facts associated with the inaccuracy of the November 24th storage report." The munis also suggested FERC and EIA should prohibit the issuance of the weekly storage report on the same day that a futures contract expires.
"It is less important whether the inventory reported was accurate or not. What is important is that the entire multi-billion dollar natural gas market [was] in limbo for a full week" until EIA released its next gas storage report, IECA's Cicio noted. "This [resulted] in seven days of unnecessary uncertainty, volatility and significant market inefficiencies."
If the EIA had been reporting storage figures daily, "there would have been gradual changes to the inventory, a clear market signal," he said. "Instead, a...faulty inventory report resulted in a significant and volatile market reaction at the same time the December Nymex contract was closing. This is unnecessary and, in this case, costly to consumers."
FERC is now weighing whether it should initiate a generic rulemaking to consider requiring interstate gas pipelines and other owners and operators of storage to post their previous day's aggregate storage data (see NGI, Aug. 9). Pipelines and local distribution companies generally oppose the proposal, offering other solutions during a public conference that FERC held on the subject (see NGI, Sept. 13).
The IECA contends there would be "significant benefits" to daily reporting of storage inventories, including reduced price volatility, increased marketplace transparency, improved data quality, market confidence, and reduced ability for "insiders" to gain unfair advantage through information that is not available to the general market.
"Benefits of daily reporting of natural gas inventories significantly outweigh any potential costs," Cicio said, stressing the impact of transparent storage information on the market. "Next to changing weather conditions, there is nothing that impacts short-term price and volatility of the natural gas price more than the weekly storage report."