With press reports now widely indicating that hedge fund Amaranth Advisors LLC’s long position was so big that it was artificially propping up natural gas futures prices for the winter forward months, Bentek Energy President Porter Bennett warned that the only way regulators could have known about the situation was if each trading company revealed all of their positions on a frequent basis. However, he warned that such a move “would destroy the well functioning, efficient natural gas marketplace we currently have.”

In filed testimony before the Federal Energy Regulatory Commission’s (FERC) technical conference on price transparency earlier this month, Bennett said Bentek believes that “distinguishing between market manipulation or other forms of malfeasance and legitimate market responses requires an ability to evaluate price moves in conjunction with market fundamentals.” He added that price moves driven by market fundamentals are legitimate, while price moves that occur against or without associated market fundamentals activity are more suspect.

“By examining the relationship of price movement to market fundamentals, we at Bentek believe that it is frequently possible to tell the difference,” Bennett said in the filing. Bentek specializes in energy market data analysis through the interpretation of fundamentals that allow companies to better make decisions in the energy marketplace.

“Look back at virtually all of the most significant price increases — the general price run-up in 2004, the severe spikes after Hurricanes Ivan in 2004 and Rita and Katrina in 2005, for example — and you see coterminous supply disruptions that changed the market’s perceptions of supply and demand balances,” he added. “When markets believe supply is short relative to demand, prices increase. As the market believes that supply and demand are becoming more balanced, prices generally flatten out. When supply is perceived to exceed demand, prices fall. These are appropriate behaviors for a well functioning, efficient marketplace.”

However, Bennett pointed out that the recent trouble at Amaranth could provide a good example of a trading strategy that significantly influenced the market resulting in price moves inconsistent with market fundamentals. Amaranth lost more than $6 billion due to wrong-way bets in the natural gas futures arena in September. In the weeks that followed, a number of calls have been made for more regulation of the over-the-counter (OTC) markets and of hedge funds (see NGI, Oct. 2; Oct. 9). During the technical conference, Industrial Energy Consumers of America President Paul Cicio called for FERC oversight of OTC markets and requested that the Commission also launch an Amaranth investigation (see NGI, Oct. 2; Oct. 16).

“Many analysts, including ourselves, scratched their heads over the past year, wondering why prices for the upcoming winter were so high relative to the prices for delivery last summer,” Bennett said. “At the time, the press and many analysts attributed the bullish price to lingering fears of future hurricanes, holdover concerns about the country’s ability to make up for production lost from last years’ hurricanes and a host of other lesser factors.”

He noted that press reports now are indicating that Amaranth was “largely responsible” for artificially propping up prices for the winter forward months. “As regulators, the only way for you to have known this for a fact would have been to require each company to reveal all their positions on a frequent basis, a requirement that would be onerous on all market participants and would destroy the well functioning, efficient natural gas marketplace that we currently have,” Bennett told FERC. “However, analysis of the fundamentals clearly indicated that price behavior was not in sync with the underlying market.”

He added that despite the artificial inflation, the market eventually proved it was self-correcting because traders ultimately attributed appropriate value to the facts that many storage fields are either full or near full, and that new production is coming on across the country. “In short, supply currently appears to be long relative to demand,” Bennett said. “Amaranth and its position were ultimately done in, because the market responded to this understanding of the fundamentals and crushed the forward winter price.”

Acknowledging that not all price moves are based on market fundamentals in the short-term, Bennett said that in the long term, prices will move toward market valuations of the underlying fundamentals.

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