While $2/MMBtu natural gas prices in the United States are a thing of the past as prices currently hover in the $5-8/MMBtu range, the higher price level is in response to supply and demand fundamentals, not a lack of market transparency, according to the Natural Gas Supply Association (NGSA).

In a recent report, the NGSA said that while complex, the U.S. natural gas commodity market "is among the most transparent of all commodity markets in the world." The association, made up of natural gas producers and marketers, said widening the existing government portal into the natural gas market, either through increased reporting or government oversight, "will not help bring energy prices down." The group said even a presumably "harmless" precautionary reporting requirement aimed at improving transparency can have material, adverse consequences on the market. Instead, the NGSA said policies addressing supply and demand fundamentals are the appropriate way to alleviate pressure on natural gas prices.

"Natural gas prices are responding to economic growth and supply and demand fundamentals," the NGSA said. The association noted that while gross domestic product (GDP) has nearly tripled in just 20 years, domestic natural gas production flattened during the last 10 years. Specifically, the NGSA said excess production capacity, demonstrated by summer to winter production swings, easily met demand increases from a growing economy between 1984 and 1995.

The association contends that demand growth had eliminated available spare production capacity by 1995. For the next five years, domestic production increases and rising imports were able to match demand driven by the economy. However, "since 2000, despite increasing rig counts and imports, natural gas supply has been flat to declining and not kept pace with demand, being driven higher by economic growth, as well as national environmental concerns. The natural gas price environment stems from demand for limited supply from a maturing resource base," the NGSA said.

The group said it believes it is a mistake to equate consumption to demand, adding that demand is growing, evidenced by the growth in GDP, natural gas-fired power generation and natural gas heating load. Consumption, by definition, equals supply, which is now relatively flat. "Prices have moderated consumption resulting in a lower quantity consumed, although demand has continued to grow," the NGSA said. "Policies addressing supply and demand fundamentals continue to be the appropriate way to alleviate volatility and pressure on natural gas prices."

The NGSA said the natural gas market is "robust and working well, based on facts regarding market fundamentals, and the new laws and FERC regulations that now underpin the health of the market." Since 2000, the changes include the 2004 Federal Energy Regulatory Commission (FERC) policy statement on good-faith price reporting and publishing; Energy Policy Act of 2005 market behavior provisions and penalties, and 2005's FERC rule prohibiting market manipulation.

The association said data show a rise in reported volume and number of transactions, and a corresponding decline in the number of indices with insufficient reporting. "A price reporting mandate, therefore, would be counterproductive in light of the voluntary response," the NGSA said. "Further, if reporting is mandated, market participants can simply move away from reportable transactions. In other words, mandated reporting does not necessarily mean more transactions that qualify for index development. Accordingly, there is not a need for government action attempting to improve transparency. The market is already transparent. The goal of government regulators should be to create a regulatory environment that encourages, not hinders, market participation and maintains market efficiency."

Looking forward, the association said a well functioning market needs all players to participate freely without artificial prohibitions, such as a regulatory limit on hedging or a bias toward index-only transactions. To facilitate an even higher level of price reporting, the NGSA suggests that state government officials should adopt policies that welcome both indexed and fixed-price transactions in utility portfolios.

"The beauty of unencumbered market participation is that if you do not like the futures market, try the cash market," the association said. "If you do not like the daily market, you can go to the monthly market. If you do not like the index, negotiate a fixed price. And, if you do not like any of the options, address the supply and demand fundamentals before Congress. It is confident access to all of the tools available for structuring a portfolio and managing risk that will maintain a properly functioning market."

The group added that speculators actually help the market because for every seller there must be a buyer, and for every buyer there must be a seller. "Speculation balances the equation when there is not enough of one or the other adding liquidity to the market. If it were not for the speculators, volatility would be higher, not lower."

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