Citing the U.S. natural gas futures market’s volatility over the past few years in spite of the market’s underlying fundamentals, the National Legal and Policy Center (NLPC) called on regulators Tuesday to investigate volatility levels and possible manipulation of the market.
Ken Boehm, chairman of the NLPC, called for the investigation in conjunction with the release of an NLPC-commissioned economic study, which concludes that recent high prices for natural gas and natural gas futures are artificially influenced by price manipulation and other nonmarket forces.
In NLPC letters sent Tuesday to Commodity Futures Trading Commission (CFTC) Chairman Reuben Jeffery III and Federal Energy Regulatory Commission (FERC) Chairman Joseph T. Kelliher, Boehm called on the CFTC to launch an investigation into “why the volatility and prices of the current natural gas futures market have departed so dramatically from the underlying economic fundamentals.”
Boehm’s request is based on the findings of a study conducted by economist and former Undersecretary of Commerce for Economic Affairs Robert J. Shapiro and Professor Nam D. Pham. Titled An Analysis of Spot and Futures Prices for Natural Gas: The Roles of Economic Fundamentals, Market Structure, Speculation and Manipulation, the study examined three different time periods and data provided by the National Bureau of Economic Research and the Energy Information Administration. The NLPC said the study is further supported by the more than $4 billion in fines levied against natural gas companies and traders by the FERC and CFTC from 2003 to 2005.
The report said that since 2000, American businesses and households have paid two to four times as much for natural gas as they did in the 1990s, and that the futures market in natural gas suggests that those prices will continue to rise for several more years. The researchers added that natural gas prices over the last 50 years can be divided into four distinct periods:
Since 2000, the report found that while demand, domestic production and net imports all have remained largely unchanged from the 1990s, wellhead prices have risen sharply. Boehms added that the report shows that current prices of natural gas futures show “a dramatic and damaging divergence” from the underlying economic fundamentals of natural gas markets. Specifically, the study finds that pricing is likely affected by three main factors other than supply and demand:
Shapiro and Pham said EIA data show the precise dimensions of this fast-expanding divergence between future prices and economic fundamentals. “Futures maturing this year are currently priced about 15% higher than wellhead prices,” the researchers said. “But the current futures price for natural gas to be delivered in 2007 is 50% higher than the current EIA forecast for natural gas prices in 2007. By 2008, the gap widens to 54%, and then to between 58% and 60% for 2009-2011.
In the report, Shapiro and Pham conclude that “Congress and various federal agencies charged with maintaining the integrity of U.S. financial markets and protecting American consumers and businesses from abusive, speculative or manipulative practices should investigate why the levels, patterns and volatility of current natural gas futures have departed so dramatically from the underlying economic fundamentals which should determine those prices.”
Boehm added, “The findings of Drs. Shapiro and Pham reveal several disturbing trends in our natural gas markets. The CFTC has an obligation to the American consumer to promptly investigate these findings. The Commission must also take punitive actions against those that are found to undermine economic principals through the manipulation of market prices, ultimately shouldered by the consumer.”
The full text of the report can be found on-line at NLPC’s website: www.nlpc.org.
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