A plea by large chemical maker, Huntsman LLC for Congress to investigate soaring natural gas prices, led by an express train futures market, apparently has been heard in Washington. Senate Judiciary Committee Chairman Orrin Hatch (R-UT) said Friday he will hold hearings when Congress returns next year. The move was seconded by Sen. Harry Reed (D-NV), assistant minority leader. The prompt month futures contract closed up 60 cents Friday at $7.22/MMBtu and reached a high of $7.55 during the week.

“Frankly, I don’t understand how market forces can cause a 50% jump in gas prices in one week, especially considering that we have a near record amount of gas in storage and a near record number of drilling rigs finding more supplies,” Hatch said.

It’s a question many have been asking recently, and it may be splitting hairs but the 50% rise in the futures market on the New York Mercantile Exchange (Nymex) occurred in the eight trading days since Nov. 26 and applies when using the January contract’s high last week of $7.55 and the Nov. 26 close of $4.925.

Reid called on the Senate Energy Committee to examine the volatility of the gas markets and the elevated price levels. “Clearly the onset of winter, increased manufacturing, and the weak dollar can apply upward pressure to the market, but this market does not appear to be reacting to the fundamentals of supply and demand,” he said in a letter to Chairman Pete Domenici (R-NM) and Sen. Jeff Bingaman, the ranking Democrat on the panel.

Hatch said that “if someone has been manipulating this market, they should go to jail. I feel we must determine once and for all if these price surges are the result of market forces or if there continues to be price manipulation.”

Hatch’s comments picked up on a complaint made earlier last week by Huntsman, based in Salt Lake City, UT, which said the price surge was inexplicable given full storage, high drilling rig counts and relatively moderate weather. The chemical maker questioned whether price fixing or manipulation was to blame and said the company was rallying other industrials to call on Congress to investigate Nymex gas futures trading with an eye to overhauling the nation’s natural gas pricing structure.

“We are experiencing the third severe gas price spike in the last three years,” said Peter Huntsman, president and CEO of the privately-held company. “We know the first was caused in large part by fraudulent trades and criminal price fixing. The second was highly suspicious at best.

“The current spike is inexcusable. It is not due to market forces. Rather, we believe it is the result of greed and, very possibly, dishonesty. U.S. gas prices now are the highest in the industrialized world, seriously jeopardizing the nation’s fragile economic recovery.” The company cited a price run-up of 50% in the last 10 days.

Huntsman has begun calling on “members of both houses of Congress on both sides of the aisle” encouraging them “in the strongest possible terms” to launch an investigation of Nymex gas futures trading. Virtually all natural gas-based chemical industry feedstocks follow the Nymex gas price, Huntsman said, resulting in the chemical industry “being held hostage to speculators and traders who are able on a whim to cause extreme price volatility. That unpredictability makes effective business planning next to impossible.”

Knowledgeable traders have blamed the latest futures price run-up on non-commercial or fund traders having amassed a large net short position since February 2003 when the market peaked at $10.10 and started down. They were sellers as the market tumbled lower, pushing it to a bottom of $4.40 for the prompt month in late October. Shortly after that on Nov. 18, the funds held 52,684 net short positions, the largest short position holding since January 2002. From that point there has been a steady rise in futures prices, with cash playing follow the leader.

The price of the near month futures contract hit $7.22 at the end of last week, up about 63% from the prompt month contract low six weeks ago. Cash prices have been tracking behind futures with some points have rising 50% in the last two weeks.

The question, according to Tim Evans, with IFR Pegasus, was ‘what were [fund traders] doing with a big short position right ahead of winter? They got caught and were vulnerable and the market has been taking advantage of them, not letting them out cheap.” It is more normal for funds to be long ahead of the winter, but Evans believes the non-commercial traders “were lulled to sleep by the price decline — and nobody called for a congressional investigation of the decline. They also were lulled by storage data, which recovered from its deficit.”

The fund traders “were probably saying ‘let’s go short and look for the price to hit $4 or $3.50.’ They weren’t basing their strategy on a whim, but let’s just say that it did reflect a somewhat limited view of the world.”

Over the last several weeks the funds have been buying back aggressively, weather predictions and the actual weather have been worsening and the price has moved steadily up. “Cold in the early part of the heating season gets a bigger price reaction than later on because the fear is there won’t be enough in storage to cover another three to five months.” It’s an old market adage that traders tend to be most influenced by their most recent market experience. “There was also a lot of gas in storage at this time last year and it didn’t last so well,” Evans told NGI in a phone interview.

He doesn’t see any evidence of manipulation in the recent price run-up. “You don’t need manipulation to get this kind of movement. I think the market, if anything, is cleaner in terms of price data” than it was in previous years,” Evans said. “You don’t have a large dominant trader like an Enron throwing their weight around. I don’t see anybody playing that kind of game in the current market.”

He defined gamesmanship as, for instance, bidding heavily if you perceived someone was short, or defending a certain price level. “That kind of gamesmanship is completely legal; it involves traders taking chances in the market.”

Will the market go to $10 again this winter? “I personally don’t think so,” Evans said. “We’re not really tracking on last year’s storage pattern. So far the year on year comparison is bearish. We might have trouble getting above $8 sometime this winter. Whatever the number is, it should be lower than last year’s $10, but if you prepare for $10, you’re less likely to see $10.”

“I don’t think it’s solely a weather story,” Evans added. “Enough industrial demand has been driven off so there’s more room for heating demand relative to last year. Normal weather is not all that supportive. You really need colder than normal weather to avoid bearish storage data. Colder than normal is the new normal.”

Huntsman, however, is convinced that something other than market forces are moving prices. “Other chemical industry leaders are joining our company in calling on key members of Congress to encourage them in the strongest possible terms to take this problem head on,” Huntsman said, calling for congressional hearings. “We are hopeful that by the first of the year we will see our government taking definitive, positive steps toward repairing all that is broken in the nation’s natural gas pricing structure.”

“The trading of almost every commodity other than gas is closely monitored and controlled.” Most other commodity futures markets have “stops” to halt trading when it gets outside of a certain range, said Huntsman spokesman Jon H. Olsen. “You don’t see the same volatility with oil or grain.” The Nymex market also has stops, although not as stringent as the grain market. If the front month gas contract changes by $3.00 or more, Nymex halts trading for five minutes. In the commodities futures market, price moves above set limits close the market for the day. The oil market has stops, Evans said, but the allowance is so high it is never breached.

Evans questioned why Huntsman didn’t have a long hedge position. “A long natural gas position is the best hedge you can make against an ethane or propane requirement. If they were using the market that way they could at least be limiting their exposure….they could even be making money on it.”

The $9 billion a year company founded by the Huntsman family purchases natural gas-based ethane and propane, which follow the Nymex price of gas, to make ethylene and polypropylene. Unlike ammonia production, Huntsman’s operations to manufacture the basic chemical building blocks are continual and cannot be curtailed when feedstock prices are high. The company employs 15,000 worldwide, with about 7,500 of the employees in the United States.

“It doesn’t hurt to ask for an investigation,” Evans said. “But it’s very unlikely it would actually determine there was anything illegal. It’s not illegal to buy and it’s not illegal to sell. If there were collusion it could be very difficult to prove. The real complaint is they don’t like result, not process. They don’t like $7.00/MMBtu.”

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