Nymex to Release Report on Gas Futures Market Composition
In an effort to dispel criticism and enlighten the ignorant about what influences natural gas futures prices and volatility, the New York Mercantile Exchange (Nymex) will release a special report sometime this month showing that hedge funds represented less than 10% of the natural gas futures trading volume this year between January and Aug. 31, 2004.
The report will provide key statistics and details on the composition of the natural gas futures market, particularly on the non-commercial side, said Madeline Boyd, Nymex senior vice president of government affairs. It also will include an analysis of the market fundamentals that pushed prices to more than $9/MMBtu and led to daily price ranges exceeding $1 last fall.
"Basically we are looking at a lot of the market fundamentals of supply and demand that drive natural gas prices so it will just go into several statistics and a quantitative analysis," she said. "We are going to present facts and our conclusion is that" hedge funds don't have as much influence on prices as many people believe.
Many gas market experts claim that the influence of hedge funds on the market is growing. Furthermore, Tom Lord, president of Volatility Managers LLC, told NGI that it's the portion of open interest held by hedge funds that matters, rather than their percentage of trading volume. "It keeps being said that non-commercials are a small percentage of the trading volume. However, they have a significant share of open interest, which is what really moves the market," he said (see related story).
Boyd said the Nymex report would "definitely" be released in January. "I just don't have a date. It is being fine-tuned as we speak and we expect to have that out early in the new year." She said Nymex probably will be submitting the report to the Commodity Futures Trading Commission (CFTC), possibly FERC and to some congressmen.
The findings probably will come as a surprise to many Nymex critics, particularly Huntsman Chemical CEO Peter Huntsman, who said in October that speculators, such as hedge funds, were responsible for recent gas price increases and volatility. "American consumers and the manufacturing sector of our economy suffer while so called 'technical traders' (hedge funds and others) prosper" from gas futures trading, he said. "Someone in Washington or New York needs to investigate" the influence of hedge funds and the role of Nymex's wide trading limits on gas futures prices (see NGI, Nov. 1, 2004). "The pricing system remains badly broken."
In an interview with NGI following Huntsman's comments, Nymex President James Newsome revealed that the exchange was conducting an investigation and planned to release a report on its findings. He said that preliminary results showed that the "role of the hedge funds is much smaller than anybody thinks it is.
"On behalf of what people think is happening, I think that is positive information to get out because we want people to look at and talk about the reality of the market composition, not speculate on the speculators."
Newsome said the report would provide more transparency in natural gas and crude oil futures markets. "We are in a unique position because we have more market information than anybody else...," he noted. "Obviously there has been a lot of discussion about the role of speculators, particularly hedge funds. The CFTC [Commitments of Traders (COT)] report doesn't break them out. It's just commercials and non-commercials. We have more specific information that we could break out, and we are trying to figure out how to best do so."
Newsome also said the report could "lead to something more permanent based upon what the CFTC thinks has value.
"Certainly at Nymex we view our markets as transparent or more transparent than any other market in the world," he said. "But to the extent that we can do more to make them transparent, certainly we're in favor of doing so. So whether it is the CFTC, the FERC or anyone else that wants to sit down and look at how we can make pricing information more transparent, we're more than happy to do so."
Boyd said the report would not be accompanied by any changes to natural gas futures trading rules.