Neither FERC nor the Commodity Futures Trading Commission (CFTC) found any evidence of manipulation in sharp upward movement of natural gas prices in late 2003, the agencies announced Monday. The CFTC blamed fundamentals, including the sudden onslaught of cold weather and storage projections.
The two agencies cooperated on the investigation. The CFTC said it “found no evidence” of market manipulation nor any attempt at manipulation in December 2003. “According to the information obtained during the investigation, the increase in natural gas prices during that time was the result of distinct factors, including market reaction to colder than expected weather in the northeast United States during the first week in December 2003, and market statements and projections regarding the inventory of natural gas in underground storage caverns made in late November/early December 2003.”
The agency said its investigation “included the extensive review of documents and audio recordings produced by numerous companies and individuals in the natural gas markets, including physical and financial traders, industry analysts, and operators of natural gas storage facilities, as well as testimony and interviews of dozens of individuals.
The Federal Energy Regulatory Commission said it had “analyzed data from more than 900,000 physical and financial natural gas bids, offers and trades, interviewed more than two dozen energy traders, pipelines, storage field operators and local distribution companies, reviewed trends in commodity prices generally, and examined futures trading activity in the non-commercial sector of the market.” It “found no evidence that any organization or individual engaged in actions or transactions intended to manipulate natural gas prices during this period.”
Earlier this month FERC called a technical conference to explore whether storage operators should be required to post the amount of gas in storage daily. The CFTC said it would be cooperating with FERC on the conference, saying it recognized “that confidence in the natural gas markets is partially based on the timely flow of clear and accurate market information….The CFTC’s interest is to ensure that the pricing of any contract is a function of market participants.”
In scheduling the conference, FERC noted the increased volatility in the futures market immediately following the release on Thursday morning of data by the Energy Information Administration of the total of additions and subtractions from storage during the previous week by a sampling of storage operators.
In its investigation announced last February, the CFTC subpoenaed the phone records of Nymex natural gas futures traders to look for any signs of collusion or market manipulation. The action came after futures prices soared after Thanksgiving from $4.92 on Nov. 26, 2003 to a high of $7.55 in mid-December (see Daily GPI, Feb. 18). The massive run-up prompted calls for an investigation by Salt Lake City-based Huntsman Chemical, which said the soaring market was the result of “greed and, very possibly, dishonesty.”
The complaints by Huntsman and others sparked calls for congressional investigations. Sen. Orrin Hatch, R-UT, chairman of the Senate Judiciary Committee, responded by promising hearings on the issue. Sen. Joseph Lieberman (D-CT) also called for an investigation into the matter by FERC and the CFTC (see Daily GPI, Dec. 15, 2003; Dec. 22, 2003).
New York Public Service Commission Chairman William Flynn also called for a closer look behind the scenes of the soaring market. In a letter to Nymex Chairman Vincent Viola, Flynn said there doesn’t appear to be “any readily identifiable reason why the price run-up should have occurred. Storage inventories are at above-average levels and weather in the Northeast during November and December has not been extreme.”
At the time, traders said it was unlikely the price upswing was the work of manipulators. “This was a price move, not a spike,” one trader said. “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.”
Because of its volatility the natural gas market has attracted a large number of speculative traders, so-called non-commercials, with no interest in the physical product, who thrive on market movement. With the demise of the middleman merchants in recent years, the number of traders with a physical interest declined, as did overall liquidity. This gave greater weight to the non-commercials who provided the necessary market liquidity, analysts have pointed out.
Commenting when the investigation was first announced, IFR Energy Services futures analyst Tim Evans pointed to the near record short position of non-commercial traders in the market just prior to the price run-un in December. 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 during the summer and prices fell, speculators went net short. They evidently didn’t see winter coming until it was already upon them in mid-December and then they had to exit their record number of short positions in a hurry, which drove prices higher, he said.
Monday’s announcement marks the second winter since the 2000-2001 findings of market manipulation, that high prices have been questioned, investigated and found to be based on market fundamentals.
Investigating price spikes in the Northeast and Midwest in February of 2003, FERC found they were due to ordinary supply and demand factors. (see Daily GPI, July 25, 2003)
The California Energy Commission and the California Public Utilities Commission also investigated high prices over the 2002-2003 winter in that state and found the weather to be the key factor (see Daily GPI, June 5, 2003).
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