The Senate Energy and Natural Resources Committee has initiated an inquiry into whether traders of natural gas futures contracts are engaging in market manipulation tactics that drive up the prices ultimately paid by end-use gas consumers.
Committee Chairman Sen. Jeff Bingaman (D-NM) Tuesday sent letters to the heads of the Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC) asking them whether they have detected "potentially anomalous market behavior" in gas futures contract trading, which may have influenced the New York Mercantile Exchange (Nymex) prices that are used by many gas suppliers in their contracts. "These costs are ultimately passed along to natural gas consumers across the nation," the senator said.
The Senate investigation is focusing on how the two agencies monitor trading of Nymex gas futures contracts, particularly as it relates to end-of-month gas trading. A weighted average price is formed during the last half-hour of trading on expiration day, which is used to set the market settlement price for gas. This price is used as the basis for a great deal of contractual supply agreements for gas to flow the entire next month. The Senate also is examining how rigorously the agencies are carrying out their oversight and enforcement activities.
In launching the inquiry, Bingaman cited the collapse of the Amaranth Advisors LLC hedge fund last fall and recent volatility in the gas futures market. In September 2006, it was revealed that Amaranth's energy trading desk co-head lost billions by betting on the future direction of natural gas prices. The fund's losses were reported to be somewhere in excess of $6 billion, and ultimately led to the closure of the Greenwich, CT-based fund (see Daily GPI, Oct. 3, 2006).
The committee "has heard from a variety of stakeholders that speculative trading in natural gas markets may be affecting prices...Their concerns are our concerns, and this is what prompted our oversight [action]," said Bill Wicker, a spokesman for Bingaman.
The Energy Policy Act of 2005 (EPAct) directed FERC and the CFTC to work together and share information to crack down on manipulation in the energy markets, he noted. "We want to know to what extent that [sharing] is happening." Since the passage of the energy law, "we've seen all kinds of volatility in the commodity markets," Wicker said.
In his letter to FERC Chairman Joseph Kelliher, Bingaman asked whether "FERC's market monitoring or enforcement staff detected and brought to your attention potentially anomalous market behavior" in the gas futures market in 2006, particularly at or around the time of the Amaranth losses. He posed a similar question to CFTC Chairman Reuben Jeffery.
Both FERC and the CFTC, along with the Securities and Exchange Commission (SEC), have been carrying out investigations into the collapse of Amaranth, The Wall Street Journal (WSJ) reported Wednesday. The agencies and the SEC have requested information from Nymex and Atlanta-based IntercontinentalExchange (ICE), but it is not known whether they have found any evidence of possible wrongdoing, it noted.
Citing published reports, Bingaman said that the CFTC "has yet to receive [the] data it requested from IntercontinentalExchange in the wake of Amaranth's collapse, related to natural gas futures trading." ICE is the operator of the leading electronic marketplace for trading both futures and over-the-counter energy contracts.
Rounding out the series of ongoing inquiries, the Senate Permanent Subcommittee on Investigations also is interviewing large gas trading companies about hedge-fund participation in the natural gas markets, the WSJ reported.
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