Seeking answers for why natural gas prices have spiked so high this winter, Sen. Joe Lieberman (D-CT) concluded 2003 by asking the Commodity Futures Trading Commission (CFTC) and the Federal Energy Regulatory Commission (FERC) to launch an investigation.

In a letter to CFTC Chairman James E. Newsome and FERC Chairman Patrick H. Wood III, Lieberman, one of the lagging Democratic contenders for the presidency, asked for a full investigation into this price spike, noting that the price increase is happening despite relatively stable supply and demand. As part of the investigation, the senator also asked that they determine whether or not market participants within their respective market jurisdictions are manipulating or distorting the price of the commodity.

“Given the public statistics and recent history, it does not appear that prices seen in the market can be fully explained by actual supply and demand conditions,” Lieberman said in the letter. “Past experience suggests that where there’s smoke, there’s fire — or where there’s unexplainable market conditions, there’s manipulation. I urge you to initiate a full examination of the natural gas markets now, lest we find history repeating itself.”

Over the last few weeks, there have been reports circulating through the market that the CFTC has, in fact, been asking questions about price movements on the New York Mercantile Exchange (Nymex). Those reports have not been confirmed, but “we would expect them to be closely scrutinizing a market under these volatile condition as a part of their role as our regulator,” said Nymex Senior Vice President Nachamah Jacobovits. In that case “we would give them full cooperation and work to get whatever information they need. We also are paying close attention to the market right now.”

In asking for the investigation, Lieberman highlighted data released by the Energy Information Administration (EIA). Citing the EIA’s most recent weekly reports, the senator said the level of natural gas in storage is well within the normal range, with working gas levels well within the five-year average and 6-8% above the level in storage last year at this time. “Although gas inventories were severely depleted at the end of last winter, the current storage situation appears quite adequate,” Lieberman stated.

Even with demand growing in response to the arrival of colder weather, Lieberman found that the EIA reported that the supply/demand balance has stabilized and demand as measured in net withdrawals from storage for the Dec. 18 reporting period were still “significantly lower than the net change of 159 Bcf for the same report week last year.”

Despite the supply/demand equation appearing to be in balance, Lieberman questioned why prices for natural gas at key trading hubs are at much higher levels than last year.

EIA reported that before the Christmas week, prices have increased by 50% since Nov. 18 and reached levels far above last year’s levels. On Dec. 18, the EIA said that prices at the Henry Hub “are nearly 24% greater than last year’s level” and that prices at the New York and Algonquin citygates were “more than 10% greater” than levels last year at this time.

One explanation offered to the politicians for the failure of the high storage levels to depress prices comes from market analysts who point out that in the past the mega-marketers held a lot of storage gas, which they would sell in mid-winter when prices went higher. Now the mega-marketers are gone and storage is mainly held by utilities whose primary concern is reliability of supply. No matter what the price, these storage holders hang tight.

One broker NGI spoke with estimated that utilities are sitting on storage inventory that they bought last summer and which, with carrying charges, has an average cost of roughly $5.15. With current prices ranging between $5.25 and a little more than $6, why would they not sell a little extra supply? Why don’t they pull that gas from the ground to take advantage of the higher prices?

It’s all in the point of view. “Hindsight is 20/20,” quipped a Northeast utility buyer responding to the question. He is not about to get caught without gas should winter become severe in February and March. “Everything you do has to make sense not only from a economic standpoint, but also from a regulatory standpoint. A marketing company can flip gas based purely on the economics involved. We have to look at other things.”

It is easy for a regulator or politician to come in next spring and play Monday morning quarterback, he continued. It is hard to explain your actions if you run out of gas in March after liquidating all of your supply in December and January. However, there is some room for discretion, he continued. “We turned back about half a Bcf of baseload supply this month based on the price. Considering how warm it has been, that has proved to be a good decision.”

Thus far this heating season, the weather has been mild and that has allowed his utility to remain above its target storage level. “We had planned to be at 75% full at the end of December. Looks like we are going to come in at about 78% full.”

Lieberman also took issue with the natural gas futures market, which has seen a similarly dramatic rise in prices. Falling back on the EIA data, the senator told Newsome and Wood that the January natural gas contract trading on the previous Wednesday (Dec. 24) on Nymex was 33% higher than 2002’s level at this time of year.

“As both of you are well aware, manipulation of the natural gas and energy markets has been rampant,” Lieberman said in his letter. “As recently as November 25th, CFTC imposed $34 million in civil penalties on three firms for past manipulation of the natural gas market and in the past year has imposed more than $130 million in civil penalties for misconduct by energy traders.

“FERC has also taken enforcement action against companies that have attempted to manipulate natural gas markets and imposed new guidelines for price index reporting. However, while your agencies’ efforts to thwart such activities are commendable, we cannot and should not assume that they have succeeded in preventing further manipulative activity.”

In looking into the gas futures market’s recent actions, Lieberman joins the ranks of New York Public Service Commission Chairman William Flynn and Huntsman Chemical (see Daily GPI, Dec. 22). Nymex suggested they need look no farther than the loss of the major gas marketers, which has led to a decline in futures market liquidity.

Sen. Orrin Hatch, R-UT, chairman of the Senate Judiciary Committee, has promised hearings on the issue (see Daily GPI, Dec. 15).

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