As the natural gas futures market dropped $9.330 cents from an all-time high of $15.780 in December 2005 to a low of $6.450 in March 2006, concerns from the mainstream media continue to grow that the market's price swings might be attached to market manipulation.
Speaking at GasMart 2006 in Denver, Jim Allison, a regional risk manager with ConocoPhillips, said the overall high price level and the recent price swings in natural gas futures have led many to believe that volatility levels are off the charts. However, Allison said data from the last 10 years shows that implied volatility levels haven't moved outside of the historical range.
There are "some signs that [implied] volatility has moved toward the high end of the historical range," he said. "This movement seems to have started around January 2006, perhaps a bit earlier for the winter 2006-2007 contracts...I conclude that any unusual scale of daily price changes is therefore more the result of the level of price than anything unusual in volatility." He also noted that intraday volatility -- which has always been "highly variable" -- has shown no notable increases over time either.
"One of the things that has been suggested as a possible cause is manipulation," said Allison. "Manipulation is a very difficult thing to disprove." However, manipulation doesn't appear to be the culprit. "When I look at the data, I do not see any [signs] of manipulation."
Allison added that on top of the data, manipulation in today's market would be difficult due to the market's size. He said he could understand how people would "put money into the market" in order to attempt to manipulate it, but getting that money out would be a much tougher feat.
Also speaking at the three-day conference was Thomas Twomey, director of Energy Services for MotherRock, a commodity hedgefund. He noted the energy sector's volatility is part of what makes it so attractive. "Volatility equals opportunity," Twomey said, adding that "the strong growth in energy derivatives usage is unlikely to reverse.
"Energy's appeal is based on increasingly liquid markets, uncorrelated returns, a volatility profile that allows for outsized returns, relatively slow pace of increasing speculative entrants and historical/continued uncertainty around underlying assets."
Addressing how end-users can strategically procure natural gas in this current market, Peter Koszalka, manager of electric fuels management for PG&E, told the audience that a structured hedging program is the way to go. He said PG&E's multi-year hedging program is pre-approved by senior management and the California Public Utilities Commission and is reviewed periodically. He also added that PG&E hedges the whole electric portfolio and manages gas price risk financially. He added that as a fuel procurer, he has "no market view," meaning he is not concerned with forecasting where the market will go. "My job is to deal with the market we have," he said. "I don't need to know [where the market is going] to be a successful hedger."
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