New York Public Service Commission Chairman William Flynn wants the New York Mercantile Exchange to investigate the reasons for soaring natural gas futures prices in light of adequate gas storage levels and normal winter weather. Nymex suggests they need look no farther than the loss of the major gas marketers which has led to a decline in futures market liquidity.

Flynn’s request for an investigations follows a similar call two weeks ago by Huntsman Chemical. Sen. Orrin Hatch, R-UT, chairman of the Senate Judiciary Committee, has promised hearings on the issue (see Daily GPI, Dec. 15).

“The price of natural gas January-delivery futures…has surged over 45% since Thanksgiving,” Flynn noted in a letter to Nymex Chairman Vincent Viola that also was sent to all the commissioners at the Federal Energy Regulatory Commission. Flynn expressed his concern about the economic impact on residential, commercial, industrial and power generation customers. “Further, there does not appear to be any readily identifiable reason why the price run-up should have occurred; storage inventories are at above-average levels and weather in the Northeast during November and December has not been extreme”

He referred to news reports that trading strategies at large hedge funds and aggressive buying by speculators might be behind the price spikes. “Given persistent and continuing concerns about potential manipulation in the natural gas market, I think it is incumbent upon Nymex to assure consumers and investors that no such manipulation is occurring.”

Flynn requested that Nymex conduct an investigation to determine the causes of the price changes and take action to eliminate manipulation if any is found.

Nymex Senior Vice President Nachamah Jacobovits said the exchange is monitoring the market very carefully to make sure nothing inappropriate is occurring. “We’ve raised margins several times,” she noted. “We certainly are scrutinizing it more carefully than we would in a period of relatively calm markets. It’s normal and par for the course that whenever you see extreme volatility, you want to make absolutely sure that there is nothing unusual going on.”

However, she said that if Nymex were conducting an investigation into a particular company or found evidence of possible manipulation, it would not be able to comment on results or on any disciplinary action taken.

“People are puzzled [by the price increases], but it’s a cold winter, and there is greater volatility and much bigger price jumps because of the fact that there aren’t as many people in there taking a longer-term view,” Jacobovits added.

She said many observers have been watching the market behave in unusual ways and have been having trouble finding answers. They apparently have forgotten the massive exodus that has occurred in the natural gas business since the fall of Enron.

This simply isn’t the same market that it was two years ago, she noted. Leaving all the fundamentals aside for a moment, observers should consider the companies that are no longer in the trading business, said Jacobovits. Most of the top 10 marketers from two years ago are now largely out of the gas futures and cash markets.

“All these companies, Duke, Dynegy, etc, if you open up your paper, they are all getting out of the trading business. Their participation in the market [used to] help cushion the shock of volatile movements.”

Liquidity has dried up as a result. There has been a significant drop in volume and open interest in the Nymex gas pit this year.

“I’m not just talking about the futures market; I’m talking about the market as a whole,” said Jacobovits. “Our futures prices are not performing that way in a vacuum. They reflect the overall market.

“Our open interest at the end of November was down 33,000 lots, which is a 9% drop from the year before at the same time. A 9% drop is a huge drop, a significant drop. Natural gas options open interest was down 25%. Our volume year to date is down 23% in gas futures.”

Any increase in hedge fund participation would be “a good thing because it adds liquidity to take the place of the other participants who have dropped out.” She disagreed that greater fund participation in the futures market might cause more of a disconnect in the price relationship between the futures and cash markets. There’s no cash-futures disconnect, she said, “if you don’t allow entities to take a position where they can influence the market, which is really the objective. No one entity can really influence the market when there’s a 12,000 lot limit.”

She said Nymex is not “overly concerned” about the decline in volume and open interest this year because most measures are still up from 2001. Nymex also believes the proper rules are in place to guard against manipulation.

“We have extended an offer to [the PSC] and are hoping to meet with [Flynn] and make him a little more familiar with how we monitor the market and what we have in place…,” she said. “We would be open to suggestions that they have as well, and will talk to them about possibly instituting some risk management education for their constituents.”

Jacobovits noted that confidentiality issues prohibit the exchange from providing details on which companies trade gas futures and how that trading group has a whole has changed during the tumultuous period in the gas market over the past couple years.

“It’s the same as in any market; the stock market doesn’t reveal who is in the market. It very likely could be illegal for us to do that. Shareholders in a company are different than participants in the market on a given day. It would be against our rules and maybe against the law for us to divulge information about which customers are in the market to anyone other than a regulatory entity. The regulatory entities have the information they need on who is in the market. The [Commodity Futures Trading Commission] always knows who is trading.”

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