As the downfall of Amaranth Advisors LLC continues to produce more questions than answers, Robert McCullough, manager of McCullough Research, said Tuesday that he believes Amaranth trader Brian Hunter quite possibly attempted to corner the natural gas market and that the “lack of federal oversight” of energy markets and hedge funds by FERC, the CFTC and the SEC helped him almost accomplish his goal.

Amaranth’s founder Nicholas Maounis told investors last week that “a series of unusual events” led to the fund losing a significant portion of its value over just a few days in September. He said the net asset value of the multi-strategy funds had declined “approximately 65% month-to-date” through Sept. 19 and “approximately 55% year-to-date.” This would put month-to-date losses for the company — which managed $9.5B as of last month — somewhere in excess of $6 billion (see Daily GPI, Sept. 19; Sept. 25).

McCullough said while the financial disaster is significant, “an issue of far more concern is how a small player in the natural gas business amassed a natural gas position significantly larger than Nymex without comment or intervention by [the Federal Energy Regulatory Commission (FERC), the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC)]. The evidence suggests that Amaranth had accumulated a natural gas position in March considerably greater than that required to corner the North American natural gas market.”

While noting that raw data regarding Amaranth is hard to come by, McCullough’s report titled “Did Amaranth Attempt to Corner the March 2007 Nymex at Henry Hub?” describes what has occurred based on the evidence that has appeared so far. “Even if the current data is scant at this point, we think that Amaranth was a situation waiting to happen, given the lack of federal oversight of energy markets by FERC and the CFTC,” he said. “Although some pundits assert that ‘the market’ is strong enough to absorb Amaranth’s ripple, we are deeply concerned that a single, somewhat small hedge fund in effect may have attempted to corner the natural gas market.”

In the report, McCullough theorized that for Hunter to lose $6 billion from a small change in the spread between March and April 2007 natural gas futures, he must have accumulated a position of 9,128,000,000 billion MMBtu. “This is an overwhelming position,” McCullough noted, adding that “Nymex’s open interests for March 2007 are a mere 900,060,000 MMBtu. In other words, Amaranth’s position may well have been 10 times the entire size of Nymex for March 2007 forwards.”

McCullough surmised that given Amaranth’s limited financial resources, it is likely that the majority of its position was options. He added that it is also likely that most of the positions were OTC, since the position dwarfed Nymex. “Data from [IntercontinentalExchange (ICE)] is more difficult to acquire, but all indications are that Hunter’s position would have dwarfed ICE as well,” McCullough said. “The rapidly rising amount of open positions in March and April would seem to indicate that Amaranth was expanding its positions over time — perhaps trying to ‘buy ahead’ of falling expectations for next spring. At the end of December 2006, open interests for March and April were 5% of the total Henry Hub open interests. As of September 22, 2006, March and April contributed 16.5% of total Henry Hub open interests. This is consistent with a desperate trader supporting the market by additional purchases, but hardly definitive, given the fragmentary state of the data.”

Of greater concern for policymakers is the fact that U.S. consumption of natural gas in March 2006 was only 2,120,047,000 MMBtu. “Simply put, Mr. Hunter had accumulated an overwhelming corner of natural gas for March 2007,” McCullough said.

“Amaranth had a massive forward position for a specific month in which the primary alternative to current production, storage, was at a minimum,” McCullough said. “The size of his position was such that physical delivery would have been impossible.”

Speculating on Hunter’s objectives, McCullough said if the trader sought physical delivery in March 2007 for only a portion of his portfolio, Hunter would have been able to dictate spot prices. If his position was only financial, Hunter raised the prices to end-users when utilities and manufacturers attempted to compete in this market for hedges.

However, the report points out that there is very little information on the contracts Amaranth was purchasing, adding that neither the CFTC nor FERC currently has the ability to determine the nature of Amaranth’s position. “While the CFTC would be able to detect Amaranth’s position if taken within Nymex, the commission has no powers over either ICE or the OTC market. FERC has traditionally restricted market surveillance to the centrally administered markets within regional transmission organizations and price reporting by industry journals. ICE and the OTC market do not fall within FERC’s existing market surveillance.”

In addition, McCullough said that while opinions on the need for increased regulation of hedge funds has been mixed over the years, Amaranth’s “staggering losses” again bring up the need to revisit the issue.

To view a full copy of the report, visit McCullough Research’s website at

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