The Commodity Futures Trading Commission (CFTC) subpoenaed the phone records of New York Mercantile Exchange (Nymex) gas futures traders last week to look for any signs of market manipulation over the last few weeks, but so far the commission’s investigation hasn’t found anything, according to a spokeswoman for Sen. Pete Domenici (R-NM) Chairman of the Senate Energy and Natural Resources Committee, which was briefed last week by CFTC staff.

The investigation apparently is not targeting individuals, but instead will examine the activities in the entire gas futures trading pit over a period of time when gas prices rose sharply.

Prices have fallen sharply since calls for the federal probe were first made. In just the last week, the price of the near-month gas futures contract plummeted nearly 20%, or about $1.35 to $5.940 on Friday.

According to a futures broker, the CFTC is examining a master tape of all phone calls in the trading pit. “Most of the floor brokers tape their phone calls but not all. But there is a master tape in the building and that’s the tape that the CFTC is monitoring,” said Ed Kennedy of Commercial Brokerage. “It’s voluminous; it’s every phone in the building. It’s going to take them a long time to go through all those tapes. It’s not a targeted investigation at a specific broker.”

Another broker said that it is unusual for the CFTC to subpoena phone records. “They didn’t even do that earlier this summer when there was a high profile look into the gasoline price spikes,” he said.

Sources close to the ongoing CFTC review of the gas market said that so far the agency has not found any “abnormal concentration” of gas futures contracts in the hands of traders that would signal the latest price run-up was the product of manipulation. The CFTC keeps close tabs on the concentration level through the daily reports its gets on individual traders who have more than 175 gas futures contracts.

“This was a price move, not a spike,” the source noted recently. “It would be difficult to conceive of a manipulation sustained over that period of time [nearly a month]…It seems very difficult to imagine. It’s one thing to get the market out of line for 60 seconds. But it’s another thing to get it out of line for 30 days.”

Gas futures prices soared after Thanksgiving from $4.92 on Nov. 26, 2003 to a recent high of $7.63. The massive run-up prompted calls for an investigation late last month by Salt Lake City-based Huntsman Chemical, which said the soaring market was the result of “greed and, very possibly, dishonesty.”

Sen. Orrin Hatch, R-UT, chairman of the Senate Judiciary Committee, responded by promising hearings on the issue. Earlier this month, Sen. Joseph Lieberman (D-CT) also called for an investigation into the matter by the Federal Energy Regulatory Commission and the CFTC. And last week Sen. Charles E. Schumer (D-NY) became the fourth lawmaker to call for either a federal probe or Capitol Hill hearings.

Domenici spokeswoman Marnie Funk told NGI last week that the Senate Energy Committee does not see a need to schedule an immediate hearing into the issue because so far the CFTC has found no proof of manipulation. The Senate panel instead will probably wait until sometime later in the spring (March-April) to hold a hearing into the overall gas market. “There’s nothing that tells us that we have to drop everything we’re doing…and dash out and hold a hearing” into gas prices now, Funk said.

Meanwhile, the Nymex is fielding questions from state regulators as well regarding the price run-up. In a recent letter to Nymex Chairman Vincent Viola, New York Public Service Commission Chairman William Flynn called for a closer look behind the scenes of the soaring market. There doesn’t appear to be “any readily identifiable reason why the price run-up should have occurred,” Flynn told Viola. “Storage inventories are at above-average levels and weather in the Northeast during November and December has not been extreme.”

The traders on the exchange apparently got the message last week. Prices plummeted as fast as they had risen.

Nymex noted recently that the decline in the number of energy marketers could be a reason for all this volatility. Gas futures volume was down 22% last year and market liquidity has suffered as a result.

Nymex spokeswoman Nachamah Jacobovits wouldn’t comment on the CFTC investigation but she said the exchange has been scrutinizing the market with a “fine-toothed comb,” ensuring that everyone is in compliance with the rules.

“Nobody likes high prices, but that doesn’t mean that they aren’t valid prices,” said Jacobovits.

Kennedy doubts investigators will find anything. “I’m going to tell you right now, they may find a couple of small guys, but I don’t think there was any collusion between any of the majors in the gas industry and the people on the floor.

“I think this price action we’ve seen is to be expected,” he said. “Every morning after I wake up the sun comes up. It doesn’t come up because I wake up first. Correlation is not always causality. What have the temperatures been like? It’s been cold. You also have a lack of liquidity in the market. That’s not manipulation. We’ve lost a lot of the major players from the 1990s and the early 2000s. You’ve lost Enron, Dynegy, Williams, and on and on. The market hates a vacuum and will tend to fill it in, but it takes time,” he added.

But the presence and position of the speculative funds on the exchange may have had more to do with the initial price run-up than the absence of the marketers. Apparently few observers remember the near record short position of non-commercial traders in the market just prior to the price run-un in December, said IFR Pegasus futures analyst Tim Evans.

Speculative funds held a net short position of 52,684 contracts on Nov. 18, 2003, which was not far from the record net short position of 62,643 contracts set on Jan. 22, 2002. As storage rose last summer and prices fell, speculators went net short. They evidently didn’t see winter coming until it was already upon them in mid-December, Evans said, and then they had to exit their record number of short positions in a hurry, which drove prices higher.

“We had a bit of cold in early December and that exposed this vulnernerability and that drove prices sharply higher,” he said. “This wasn’t market manipulation any more than a train wreck was manipulation. This was a train wreck waiting to happen, and it did happen. And now there are people with enough influence politically to cry foul and get this investigation launched.

“They may find some minor compliance issues; somebody who got a bad fill or a broker trading ahead of his own customers during a fast market in which the price was just soaring. They may find some minor infractions, but I don’t think they will find wholesale disregard for the rules,” said Evans. “We already had Enron and all the natural gas pricing scandals and lawsuits. Brokers are looking to avoid that kind of embarrassment, not court that kind of embarrassment.”

Evans also noted that there’s a rather large group of gas market observers that believes there’s a gas supply problem that will be rearing its ugly head shortly. A few weeks of severe cold can put a serious dent in the gas storage surplus, he said.

So far, however, that has not occurred. And unless the industry can manage 200 Bcf-plus storage withdrawals over the next three weeks, the gas storage surplus will continue to grow. That possibility may have had something to do with the market falling $1.35/MMBtu last week.

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