An expert in energy markets told a House committee Thursday that he does not believe there’s any “firm basis” to conclude excessive speculation or manipulation is driving crude oil prices to record levels.

“If excessive speculation or manipulation is distorting prices, that will become manifest in what goes on in the physical market. You will see distortion in the amount of inventory or you will see distortion in the flows of oil in the interstate and the international market. To date nobody, to my mind, has brought up any credible evidence that these distortions exist. And given such absence of evidence, there’s really no firm basis to believe that there is anything in the order of excessive speculation or manipulation that is causing oil prices to be $140 or $130 or $135,” said Craig Pirrong, director of the Global Energy Management Institute at the University of Houston, during a second consecutive hearing by the House Agriculture Committee into the issue.

“I think that the key thing is, going forward, we just shouldn’t look at prices. We should look at the real market for oil. We should look at the physical market as well as the derivatives markets. [We need to] understand the linkages between these two markets and proceed in a prudent and considered manner because intemperate or ill-thought-out actions to constrain speculation could have very adverse effects on [the] operations of both the physical and financial markets.”

Charles Vice, CEO of Atlanta-based IntercontinentalExchange (ICE), disputed claims that ICE’s exchanges in the United States and United Kingdom have contributed to the run-up in oil prices. He noted that ICE’s over-the-counter (OTC) markets have no bearing on the price of crude oil and do not set the price for major benchmark products. Trading volumes in ICE’s OTC markets are almost solely related to contracts for natural gas and power, he told the House committee.

Moreover, Vice said that trading in the West Texas Intermediate (WTI) crude oil futures contract on ICE Futures Europe exchange comprises only 15% of the open positions in the global WTI market, while the New York Mercantile Exchange (Nymex) has 85% of the open positions. He noted that ICE’s share of the WTI market has been steadily declining since prices began to rise in 2007. “This fact is counter to assertions that investors have been ‘flooding into overseas markets’ in search of an imagined regulatory loophole.”

Under amended agreements with the Commodity Futures Trading Commission (CFTC) and the UK’s Financial Services Authority, he said the ICE WTI contract is subject to the same U.S. regulatory provisions of the Nymex WTI contract, including position reporting and position accountability and limits.

While the focus of the hearing was on oil prices, a municipal utility executive testifying on behalf of the American Public Gas Association warned that natural gas consumers are going to cringe when they receive their gas heating bills this coming winter.

“This December when natural gas customers open their heating bills, the commodity cost is expected to have doubled from last December,” said Michael Comstock, acting director of the City of Mesa’s Arizona Gas System. Given that natural gas is used as an input fuel to generate electricity, electricity heating bills also are expected to be high.

“We, along with other consumer groups, have watched with alarm over the last several years certain pricing anomalies in the market for natural gas. More recently we have noticed record run-ups in the price of natural gas.” The Henry Hub price Wednesday for natural gas was $12.095 for August delivery.

“If gasoline prices increased at the same rate of natural gas prices have increased over the last 10 years, drivers would now be paying more than $6.50 per gallon,” Comstock said. The current price for a gallon of regular gasoline is about $4.11.

“To bring natural gas prices back to a long-term affordable level, we ultimately need to increase the supply of natural gas,” he said. But that isn’t likely to happen given the House Democrats’ opposition to lifting the moratorium on leasing in the federal Outer Continental Shelf and/or opening the Arctic National Wildlife Refuge to exploration and production.

“However, equally critical, is [the need] to restore public confidence in the pricing of natural gas. This requires a level of transparency in natural gas markets, which assures consumers that market prices are the result of fundamental supply and demand forces, and not the result of manipulation [or] excessive speculative trading,” Comstock said.

He noted that passage by Congress of the farm bill in May, which closed the Enron trading loophole, was a good first step, but he said that more action was needed (see Daily GPI, May 23). “For example, the over-the-counter market currently remains opaque to regulatory scrutiny.” Comstock said more transparency was needed in the OTC market to enable the CFTC to assemble a full picture of trader positions and thus understand large traders’ potential impact on the market.

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