APGA: 'New Manipulative Forces' at Work in Gas Markets
The American Public Gas Associaton (APGA) says the recent falloff in natural gas prices leads it to believe that more than the traditional supply-and-demand forces were at work last winter in driving up prices.
The drop in prices in the past couple of weeks "increases our suspicions that the markets were especially subject to new manipulative forces last winter --- the season when many Americans have no choice but to purchase enough natural gas to heat their homes," APGA Executive Director Robert Cave wrote in a letter last week to Acting Administrator Larry Pettis of the Energy Information Administration (EIA).
The June 13 letter was in response to an EIA report, "U.S. Natural Gas Markets: Recent Trends and Prospects for the Future," which concluded that constrained domestic capacity, unusually high demand and low storage inventories were largely to blame for the run-up in gas prices last winter.
However, "in our view, EIA's data --- the only data we have --- supports neither the contention that domestic production was constrained nor that there was...'unusually high demand,'" said Cave, whose group represents municipal gas distributors. In fact, the EIA reports that domestic production, net imports and net storage withdrawals exceeded consumption last year by 911 Bcf, which was up from the 513 Bcf surplus in 1999. "If there was a shortage (and APGA has no evidence of one), or a supply-demand imbalance, EIA's data do not demonstate it," he noted.
One of the "contributing causes" to last winter's price spikes involved price speculation, Cave told Pettis. "APGA's members have anecdotal indications of an increase in price speculation in natural gas commodities." During 2000, "natural gas became a popular investment vehicle for hedge funds, brokerage houses and other sophisticated investors. The perception must have existed that money could be made in natural gas commodities."
He noted the volume of financial transactions on the New York Mercantile Exchange (Nymex) "grew to many multiples of physical capacity to deliver gas in the United States;" energy commodity trading companies announced record revenues; and the Nymex began after-hours trading last year, where volumes were "appreciably lower" than in the regular exchange. "That market may have been manipulated because trading volumes were light, and the after-hours market may have influenced the broader market to increase prices."
Cave further cited the growing popularity of over-the-counter markets and private on-line exchanges, such as EnronOnline and Altra Energy Technologies Inc. EnronOnline has traded more than $525 billion in commodities, while Altra Energy --- the first profitable independent e-marketplace --- oversaw $8 billion in transactions during the first quarter of this year. "APGA is aware of no public studies or reports on the impact of such private on-line exchanges on energy markets. But their rise correlates with the rise in prices paid by consumers," he said.
He also suggested that the escalating price for gas in California "may have influenced the prices nationally." Cave said the APGA was closely watching FERC's current investigation into whether gas prices were illegally manipulated in the California market by El Paso Natural Gas and its merchant power affiliates. "APGA is concerned...that market power gained through the unregulated control of pipeline capacity will lead to unjust and unreasonable prices for natural gas service throughout the United States."
The APGA asked the EIA to address its concerns as part of a long-term study of the natural gas market that the agency has undertaken at the direction of Energy Secretary Spencer Abraham. The study is to be completed by October 2001.
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