Soaring natural gas prices, which have been led by the futures market recently, are inexplicable given full storage, high drilling rig counts and relatively moderate weather, chemical maker Huntsman LLC said Wednesday in calling on Congress to investigate NYMEX gas futures trading with an eye to overhauling the nation’s natural gas pricing structure.

“We are experiencing the third severe gas price spike in the last three years,” said Peter Huntsman, president and CEO of the privately-held company. “We know the first was caused in large part by fraudulent trades and criminal price fixing. The second was highly suspicious at best.

“The current spike is inexcusable. It is not due to market forces. Rather, we believe it is the result of greed and, very possibly, dishonesty. U.S. gas prices now are the highest in the industrialized world, seriously jeopardizing the nation’s fragile economic recovery.” The company cited a price run-up of 50% in the last 10 days.

Huntsman has begun calling on “members of both houses of Congress on both sides of the aisle” encouraging them “in the strongest possible terms” to launch an investigation of NYMEX gas futures trading. He said the system that allowed fraudulent price fixing in 2001 remains largely in place today.

“Little has changed,” he said. “The trading of almost every commodity other than gas is closely monitored and controlled.” Most other commodity futures markets have “stops” to halt trading when it gets outside of a certain range, said Huntsman spokesman Jon H. Olsen. “You don’t see the same volatility with oil or grain.”

“Other chemical industry leaders are joining our company in calling on key members of Congress to encourage them in the strongest possible terms to take this problem head on,” Huntsman said, calling for congressional hearings. “We are hopeful that by the first of the year we will see our government taking definitive, positive steps toward repairing all that is broken in the nation’s natural gas pricing structure.”

Virtually all natural gas-based chemical industry feedstocks follow the gas price established by NYMEX futures trading, Huntsman said, resulting in the chemical industry “being held hostage to speculators and traders who are able on a whim to cause extreme price volatility. That unpredictability makes effective business planning next to impossible.”

The $9 billion a year company purchases natural gas-based ethane and propane, which follow the NYMEX price of gas, to make ethylene and polypropylene. Unlike ammonia production, Huntsman’s operations to manufacture the basic chemical building blocks are continual and cannot be curtailed when feedstock prices are high. The company employs 15,000 worldwide, with about 7,500 of the employees in the United States.

Knowledgeable traders have blamed the latest futures price run-up on non-commercial or fund traders having amassed a large net short position since February 2003 when the market peaked at $10.10 and started down. They were sellers as the market tumbled lower, pushing it to a bottom of $4.40 in late October. Shortly after that on Nov. 18, the funds held 52,684 net short positions. The question, according to Tim Evans, with IFR Pegasus, was ‘what were they doing with a big short position right ahead of winter? They got caught and were vulnerable and the market has been taking advantage of them, not letting them out cheap.”

The funds’ November peak was the largest short position since January 2002. It is more normal for funds to be long ahead of the winter, but Evans believes “they were lulled to sleep by the price decline — and nobody called for a congressional investigation of the decline. They also were lulled by storage data, which recovered from its deficit. They were probably saying ‘let’s go short and look for the price to hit $4 or $3.50.’ They weren’t basing their strategy on a whim, but let’s just say that it did reflect a somewhat limited view of the world.”

Over the last several weeks the funds have been buying back aggressively, weather predictions and the actual weather have been worsening and the price has moved steadily up. “Cold in the early part of the heating season gets a bigger price reaction than later on because the fear is there won’t be enough in storage to cover another three to five months.” Evans noted also that traders tend to go by their most recent experience. “There was also a lot of gas in storage at this time last year and it didn’t last so well.”

Will the market go to $10 again this winter. “I personally don’t think so. We’re not really tracking on last year’s storage pattern. So far the year on year comparison is bearish. We might have trouble getting above $8 sometime this winter. Whatever the number is, it should be lower than last year’s $10, but if you prepare for $10, you’re less likely to see $10.”

“I don’t think it’s solely a weather story,” Evans added. “Enough industrial demand has been driven off so there’s more room for heating demand relative to last year. Normal weather is not all that supportive. You really need colder than normal weather to avoid bearish storage data. Colder than normal is the new normal.”

Evans doesn’t see any evidence of manipulation in the recent price run-up. “You don’t need manipulation to get this kind of movement. I think the market, if anything, is cleaner in terms of price data” than it was in previous years,” Evans said. “You don’t have a large dominant trader like an Enron throwing their weight around. I don’t see anybody playing that kind of game in the current market.”

He defined gamesmanship as, for instance, bidding heavily if you perceived someone was short, or defending a certain price level. “That kind of gamesmanship is completely legal, it involves traders taking chances in the market.”

Evans questioned why Huntsman didn’t have a long hedge position. “A long natural gas position is the best hedge you can make against an ethane or propane requirement. If they were using the market that way they could at least be limiting their exposure….they could even be making money on it.”

A lot of agricultural commodity futures have trading limits, which, for instance don’t allow prices to move more than 50 cents a bushel per day, Evans said, but those limits bring on their own kind of gamesmanship. “Limits can engender a sense of panic, because if a limit is hit, then you can’t get out; then it might immediately hit the limit the next day and you’d be stuck for another day.”

There were limits on natural gas futures, Evans said, but they were removed in 1997 after the market reached the limit five times in seven days and it wasn’t all in one direction. “Limits hurt market liquidity, could limit open interest in a market and provide another potential for abuse or gamesmanship.” Crude oil has a very wide limit of about $5 a day. “It’s so wide it is never hit.”

Meanwhile, the non-commercial traders are what give the market the liquidity it needs to effectively allocate gas, he said.

“It doesn’t hurt to ask for an investigation, but it’s very unlikely it would actually determine there was anything illegal. It’s not illegal to buy and it’s not illegal to sell. If there were collusion it could be very difficult to prove. The real complaint is they don’t like result, not process. They don’t like $7.00/MMBtu.”

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