did they fire the NG traders yet?<NG> or are they going to short from an even higher price?<G>
December 13, 2003
Natural Gas Prices Surge and Fingers are Pointing
By SIMON ROMERO
OUSTON, Dec. 12 - Natural gas prices have surged nearly 50 percent since Thanksgiving despite an apparent lack of events that normally create such spikes, like tight supplies or forecasts of unusually cold weather.
The frenzied climb in prices has led to calls for investigations by politicians and executives of gas-dependent industries into whether traders have improperly manipulated natural gas markets.
Companies in the chemical, fertilizer and ammonia industries that depend on natural gas as an essential ingredient for their products have been among the most vocal in their complaints about gas prices, which have soared to their highest level since February.
"We're extremely alarmed by the events of the last several days," said Peter R. Huntsman, the chief executive of the Huntsman companies, a large manufacturer of chemical products. "If what is happening with natural gas would happen with crude oil, we'd have declared war on OPEC by now."
High natural gas prices, if they are sustained, could cascade through the economy and result in higher heating and electricity costs for consumers, because gas is used by many power plants as the main fuel, analysts said. Natural gas, which has remained relatively expensive over the last year, rose 9 percent in the futures markets on Friday, to $7.22 per million British thermal units, compared with $4.93 at the end of November.
Several traders and analysts suggested that trading strategies at large hedge funds and other financial firms were behind much of the swift run-up in prices. Some funds were thought to have made large bets in the futures markets at the beginning of this month that the price of natural gas would fall below $5 per million B.T.U.'s. Pressure by funds that made opposite bets and a scarcity of other traders in the market could have subsequently caused prices to climb.
"There's a great deal of speculative froth at the moment," said Kyle Cooper, an energy futures analyst with Citigroup in Houston.
Responding to calls for greater scrutiny of natural gas markets, Senator Orrin G. Hatch, Republican of Utah and chairman of the Senate Judiciary Committee, said on Friday that he would hold hearings next month into whether improper manipulation of natural gas markets was taking place.
"Natural gas is so critical to U.S. consumers and the economy that if someone has been manipulating this market, they should go to jail," Mr. Hatch said in a statement. "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."
Several large energy companies, including Duke Energy of Charlotte, N.C., and Dynegy Inc. of Houston, have recently paid millions of dollars in fines to settle federal charges that they tried to manipulate prices of natural gas contracts improperly.
Mr. Cooper, like most other experts in the natural gas market, said there were few fundamental reasons for natural gas prices to climb so high in such a short period of time.
Natural gas inventories in the United States, for instance, stand at nearly three trillion cubic feet, or 7 percent above the level registered at this time last year. Natural gas stocks are also about 3 percent higher than the five-year average for such inventories, the Energy Information Administration said this week.
R. David Gary, a spokesman for the Commodity Futures Trading Commission, which oversees and regulates trading of natural gas contracts, declined to say whether the commission had begun its own investigation of the increase in prices. But Mr. Gary did confirm that the commission had increased surveillance in recent days of large financial participants in the natural gas markets, standard procedure after such a wide price swing.
Executives at the New York Mercantile Exchange, which lists the benchmark Henry Hub natural gas futures contract among its products, insisted on Friday that they had not seen any unusual manipulation of natural gas prices. J. Robert Collins, the president of NYMEX, said much of the recent run-up in gas prices was related to lower investments in infrastructure, drilling and trading activities by energy companies since the collapse of Enron two years ago.
"I've seen nothing that would cause us to believe anything improper has been going on," Mr. Collins said. "Over the last couple of years there's been a massive exodus of capital from the industry that has caused the natural gas market to react with more volatility."
Natural gas, which accounts for about a quarter of the nation's energy needs, has remained relatively expensive during the last year as supplies tightened largely because the fuel, promoted as a cleaner-burning alternative to coal and oil, came under increasing demand to fire new electricity plants.
Gas drilling has increased, mainly in the Rockies and in Texas, but much of it has come from fast-depleting wells. Imports of natural gas from Canada, meanwhile, have grown less reliable than in past years as demand for the fuel has also increased in that nation. The shortage resulted in a wave of layoffs and plant closings earlier this year at numerous chemical, ammonia and fertilizer companies that depend on natural gas as a basic component for their products.
"What's happening in natural gas markets has the very real potential to stop the manufacturing recovery in its tracks," said Greg Lebedev, president of the American Chemistry Council. "At the moment, the price of natural gas is serving as the single largest brake on the U.S. economy."
After stored supplies of natural gas fell to their lowest level in a quarter-century over the summer, inventories gradually recovered, easing concern about the possibility of a severe shortage. Still, the prospect of sustained higher prices for natural gas led the Federal Reserve chairman, Alan Greenspan, to call recently for increased imports of liquefied natural gas to avoid the potentially debilitating effect on the economy.
Aside from the immediate effect higher gas prices might have on the chemical industry, it remains to be seen how they will affect the wider economy. Stephen Brown, director for energy economics at the Federal Reserve Bank of Dallas, said that electricity prices could climb in some parts of the country but that it depended on what type of contracts or hedging strategies individual power companies had in place to guarantee the delivery of natural gas at certain prices.
Analysts are expecting the volatility in the natural gas markets to continue next week. One analyst, Phil Flynn of the Alaron Trading Corporation in Chicago, predicted that the price of natural gas could climb as high as $13 per million B.T.U.'s this winter, or nearly double its current level, through a combination of speculative activity and concern over long-term supplies.
"Quite literally we could be faced soon with the choice of paying more to keep the thermostat up high or getting our sweaters out," Mr. Flynn said.
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