Congress and the Commodity Futures Trading Commission (CFTC) should investigate daily trading limits, hedge fund activity, and the number of contracts that can be held by a single entity to determine if these elements are increasing volatility and prices, a Dow Chemical company representative told energy committee senators Monday.

When a Nymex representative responded that the “easy answer” to containing volatility is to hedge, Gary Chapman, senior commodities manager for Dow Chemical, said he was talking about reducing “unnecessary price volatility.” There’s something wrong “when markets are running so hard that even a large player like Dow can’t catch up with some of these other guys,” he added.

Chapman, representing the Consumers Alliance for Affordable Natural Gas (CAANG), pointed out that Dow Chemical is the largest industrial buyer of natural gas and is a very large hedger. He said the CFTC should assess the possible negative influence of hedge fund activity and should examine the effectiveness of the current trading limits, saying the $3 limit and five-minute stop were not sufficient to keep the market from wild price swings.

The allowed daily range on natural gas is double that of any other energy commodity and four times that of agricultural commodities. In the five years from 2000 to 2004, the daily range of the natural gas futures market exceeded 50 cents 40 times and 75 cents 20 times and never hit the price limit, Chapman said.

Congress should direct a study of over-the-counter markets’ capacity to manage natural gas contracts efficiently and fairly and should require a report from the CFTC on whether the 12,000-contract limit on a single entity “allows such a concentration of contracts that it may distort free movement of the market,” the CAANG said in written testimony. The agency should recommend necessary changes to the contract limit. It also should assess whether hedge funds increase volatility and prices to consumers and recommend statutory changes to require oversight of hedge fund traders, the group said.

Rick Schultz, director of market oversight for the CFTC, told the Senate Energy and Natural Resources Committee conference on natural gas that the agency does not require price movement limits and it has looked at the question of limits “many times over the years.” He pointed out “there are very real costs involved in stopping the [futures] market while the cash market is going on.” Traders “may want to get out of positions or establish new positions and they wouldn’t be able to do that.”

Robert Levin, speaking for Nymex, characterized Chapman’s complaints as a “flat earth mentality,” saying “the cash market goes on whether we do or not.”

CAANG also said the CFTC should be required to determine whether there is adequate transparency, revealing who actually holds the positions and what their obligations are to disclose their interests in any public statements. Congress should also assess the adequacy of the budgets for the CFTC and other oversight and enforcement groups, it said.

The futures market exchange took place during the last panel of the day examining natural gas issues before the Senate Energy Committee. This panel also engaged in a spirited exchange over the reporting of storage surveys by the Energy Information Administration (see Daily GPI, Jan. 24).

Bob Anderson, head of the Committee of Chief Risk Officers (CCRO), again raised the possibility of creating a data hub, which he said would broaden the transaction data captured and increase market transparency. While “existing storage and market information are probably adequate to ensure well functioning natural gas markets in the short term,” he urged the Senate to instruct the CFTC and FERC to foster industry development of the data hub as a long-term improvement.

However, Skip Horvath, president of the Natural Gas Supply Association, said that “if an energy hub has merit, the market will produce it.” Ranking committee minority member Sen. Jeff Bingaman, D-NM, agreed, saying “this is not something Congress should legislate.”

Earlier in the day numerous witnesses explored natural gas supply and demand issues (see Daily GPI, Jan. 24).

Committee Chairman Pete Domenici, R-NM, said the best proposals would be incorporated in a new energy bill expected to emerge from the Senate committee in March (see related story).

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