The New York Mercantile Exchange (Nymex) is planning to release a report before the end of this year detailing the types of participants in the natural gas and crude oil futures markets, Nymex President James Newsome, former chairman of the Commodity Futures Trading Commission (CFTC), said in an interview with NGI last Thursday.

Newsome said the move is largely in response to incorrect statements made by some market observers, including Huntsman Chemical last week, that hedge funds and other speculative elements are driving up the price of natural gas without regard to market fundamentals.

“Our intention is to bring out the report, not only looking at natural gas but crude oil as well, just to show an actual composition of who is in the marketplace, primarily to offset some of the inaccurate comments that many people are making about the role of hedge funds and how much influence they are having on prices,” he said.

Huntsman Chemical, a major global manufacturer of diversified chemicals and a large natural gas buyer, on Wednesday reiterated its call for tighter natural gas futures price movement limits and for an investigation into gas prices and the gas market participants on the exchange.

“American consumers and the manufacturing sector of our economy suffer while so called ‘technical traders’ (hedge funds and others) prosper,” Huntsman CEO Peter Huntsman said. “It makes no sense, and someone in Washington or New York needs to investigate.”

Citing a natural gas futures price surge of 25% in the previous week’s trading, Huntsman said, “The pricing system remains badly broken.”

Huntsman made similar comments last year when futures prices soared following Thanksgiving from $4.92 on Nov. 26, 2003 to a high of $7.55 in mid-December. At that time, he said the soaring market was the result of “greed and, very possibly, dishonesty.” An investigation by FERC and the CFTC later found that charge to be inaccurate.

In 2001, Huntsman Chemical lost about $250 million in income mostly because of high gas prices. Like many other large energy intensive industrial and manufacturing companies, it was forced to restructure. It laid off about one-third of its U.S. workforce, about 1,000 full-time employees and another 250 contractors.

“We shut down some of our gas consuming facilities. And you know the sad thing about it was that 10 months later the price was at $2/MMBtu again,” Huntsman said in an interview with NGI last week. “[Natural gas] didn’t need to go down that low and it didn’t need to go up that high. It’s the volatility that kills companies like ours.

“You can go to China, which doesn’t have any [domestic natural gas production] at all. You can go to Europe, the Middle East, South America. You can go anywhere and get more stable gas prices. When gas prices go up the way they do on the Nymex, it affects the price of oxygen, nitrogen, ethane, propane and a lot more products. It’s not just natural gas. I can’t hedge against those products. I can’t lock in my finished prices.

“We are trying to get customers to agree to lock in a contract that has a surcharge for gas,” he said. “But as the economy gets more global, customers realize that if they buy from one of our other facilities in China or Europe, they won’t have to pay the gas surcharge. Their price of gas over there may move 20% up or down in a year, whereas it moves 20% in two or three trading days here.

“Why would they buy from an American business? We have the highest price of gas anywhere and the most volatile price of gas.”

This problem hasn’t happened overnight. In fact, there have been investigations by federal regulators into the market for the last two or three years. Last winter’s sharp price increases and public criticism by Huntsman and some Congressmen prompted the CFTC to step in and subpoena the phone records of Nymex natural gas futures traders to look for any signs of collusion or market manipulation (see NGI, Jan. 19).

The CFTC and the Federal Energy Regulatory Commission (FERC) conducted an extensive review of data from more than 900,000 physical and financial natural gas bids, offers and trades, audio recordings produced by numerous companies and individuals, and interviews with more than two dozen energy traders, pipelines, storage field operators and local distribution companies.

They found no evidence of price manipulation in the gas futures market. The regulators said the price run-up was caused by market fundamentals, including the sudden onslaught of cold weather and storage projections, a conclusion that was similar to the results of prior market investigations including one less than a year earlier regarding the price increases in February 2003 (see NGI, July 28, 2003; Sept. 6).

It is deja vu all over again this year. Critics once again say there are no clear fundamental reasons for the price increases. Prices rose to nearly $10/MMBtu last week for January and February delivery despite the likelihood that there will be more gas in storage this winter than ever before.

Huntsman said he’s not claiming there is “anything necessarily illegal” happening on Nymex. “However, Nymex sets its own trading rules; it is responsible for price spikes and for otherwise causing market volatility. The Commodity Futures Trading Commission is supposed to provide consumers with oversight of trading but all it can do is make certain Nymex is playing by its own rules.”

Some market observers have attributed Nymex’s reluctance to impose tighter trading limits on natural gas futures to its “good business sense.” After all, stopping trading more frequently could reduce participation in the markets and lower the exchange’s bottom line, critics claim. Disclosing more information about traders also could put pressure on confidentiality agreements with customers, which might damage exchange business.

“They profit like any exchange does, off the number of people that trade,” Huntsman said in the interview with NGI. “Look at the amount of volatility over the last couple of years as volatility has increased, volume has increased, and the number of hedge funds and the percentage of hedge funds and money managers that have gotten into the market certainly have increased.”

Newsome disputed many of Huntsman’s claims. He said there were some obvious inaccuracies in Huntsman’s public statement regarding Nymex. “Nymex certainly does set exchange rules, but it does so within the parameters of CFTC rules and regulation, and the CFTC not only conducts rule reviews to make sure that Nymex is adequately following its own rules but that it’s following commission rules as well.

“Nymex as an exchange is price neutral, so to blame Nymex for price spikes and volatility is like shooting the messenger for bringing negative news.”

However, Newsome also said the exchange is going to provide more transparency in natural gas and crude oil futures markets through a special report on the subject. “We are in a unique position because we have more market information than anybody else obviously,” he noted. “And we are discussing it now and formalizing a report that goes into more detail about who makes up the markets, whether that is crude oil or natural gas.

“Obviously there has been a lot of discussion about the role of speculators, particularly hedge funds. The CFTC [Commitments of Traders (COT)] report doesn’t break them out. It’s just commercials and non-commercials. We have more specific information that we could break out, and we are trying to figure out how to best do so.

“I can tell you from the preliminary information that I’m not ready to discuss the specifics, but the role of the hedge funds is much smaller than anybody thinks it is,” he told NGI. “On behalf of what people think is happening, I think that is positive information to get out because we want people to look at and talk about the reality of the market composition, not speculate on the speculators.”

He said Nymex is planning to provide a one-time report on market composition, but the report could “lead to something more permanent based upon what the CFTC thinks has value.”

Nymex Senior Vice President Nachamah Jacobovits reiterated that the exchange would never release any names of actual market participants as some Nymex critics have demanded.

Newsome said, “Exactly what I’m thinking of is further breaking down the noncommercial component of the large traders report. We could do [the commercial side as well]. But I think most people are more interested in the noncommercial side — the general categories [being] hedge funds, locals, etc. I’m not sure how specific we would get on the commercial side but I think we probably could break it down [into marketers, producers, local distribution companies, etc.]

“If you are going to get a total picture of market composition,” said Newsome, “you have to look at both” daily trading and intra-day trading, in which speculators get into and out of market positions before the daily trading session is over. Intraday trading currently is not captured by the COT report. Some market experts have claimed that many speculators and other noncommercials in the market rarely go home with open positions in the market.

“I’m very aware that the large trader report submitted to the CFTC just shows the end-of-day position,” said Newsome, “but I think when you look at longer term price discovery that is what is important because those are the positions that are used in the settlements that determine price discovery. In the bigger picture, those are the more important positions to look at, although I’m not opposed to showing more. In fact, the reports that we’re generating internally do show the intraday volume.”

The COT reports (see https://intelligencepress.com/data/cot/) currently show market composition based on open interest. Newsome said that showing market composition based on volume rather than open interest certainly could be done “but that’s an issue to be decided by the CFTC.”

“Certainly at Nymex we view our markets as transparent or more transparent than any other market in the world,” said Newsome. “But to the extent that we can do more to make them transparent, certainly we’re in favor of doing so.

“So whether it is the CFTC, the FERC or anyone else that wants to sit down and look at how we can make pricing information more transparent, we’re more than happy to do so.”

Are Trading Limits Too Wide?

The other issue brought up by Huntsman regarding natural gas futures trading is the current $3/MMBtu price movement limits, which if hit would be followed by a five-minute trading hiatus and then resumption of trading with another $3/MMBtu limit. Huntsman noted that theoretically natural gas futures could move up more than $162/MMBtu in one day with the existing price limits. Gas futures would have to immediately rise $3 in the one minute following its 10 a.m. opening followed by a five-minute break, and would have to continue doing that until the trading session ended at 2:30 p.m. EDT in order to move up by $162/MMBtu.

Newsome noted that the CFTC currently does not require price limits on commodity futures trading. “In fact the only thing in the rules would be just the opposite of Mr. Huntsman’s comments,” he said. “The CFTC guideline say that if you are going to have price limits we require you not to set them so tightly that it doesn’t allow the market to move and to operate.”

Nevertheless, Newsome said Nymex was willing to discuss changing the limits if “the authorizing committees in Congress and the CFTC think that it should be looked at.

“But I’m an economist and a very free market economist, and my philosophy is that just because you fear bad news that doesn’t mean you should set the price [limits] so tight that it doesn’t allow the market to move… The cash markets continue to operate and all you do is create a disadvantage for those who are participating in futures markets.”

Neither Newsome nor Jacobovits could say whether the $3/MMBtu trading limit had ever been reached during any daily trading session. “I’m not sure on that, but I don’t think so,” said Jacobovits.

“Limits are in place just to give those on the floor really an opportunity to step back and look at what is going on and to gather more information and thoughts,” Newsome added.

“So if Mr. Huntsman or anyone else’s idea to put price limits on it is to try and keep the market from moving in the direction and the size of the direction that the market wants to go, then I think you are creating artificial prices, which are very negative for the marketplace.”

©Copyright 2004 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.