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Natural gas prices a puzzle

Associated Press - November 17, 2004
by Brad Foss

If the law of supply and demand really drives commodity prices, then something seems amiss in the natural gas market.

Natural gas futures are trading on the New York Mercantile Exchange at prices roughly 50 percent higher than a year ago, even though government data show that demand has declined and pre-winter storage levels are well above historical norms. This is in stark contrast to the oil market, where prices are higher amid global output limitations and unexpectedly strong consumption.

The rise in natural gas prices has coincided with a big increase in trading by hedge funds and other speculators. And in a letter being sent Wednesday to lawmakers, an organization representing industrial users of gas says the market has become vulnerable to manipulation.

Whatever the cause, the Energy Department predicts homeowners will spend on average $1,000 this winter on heating bills, a 15 percent increase.

Manufacturers of chemicals, plastics and resins, for whom natural gas is both a raw material and an energy source, also feel the pinch. They are complaining to Congress about their fuel costs after a steep rise in prices in September and October.

The jump in natural gas prices has not received as much media attention as the oil-price run-up, but consumer advocates and industry groups say it is more troubling from their perspective.

Tighter controls cited

Most natural gas pumped to American factories and homes is produced domestically and shouldn't be as vulnerable to the geopolitical turmoil that has roiled oil markets.

"The natural gas market price is no longer being set by consumers' demands for the physical supply of gas," Paul Cicio, the executive director of the Industrial Energy Consumers of America, said in a letter to be sent Wednesday to members of Congress. "Instead of the market serving the greater public good, it serves the investment interests of ever-growing unregulated billiondollar hedge funds that are completely disconnected from the consumer and manufacturing market."

Cicio's organization represents companies ranging from Dow Chemical Co. to Bayer Corp. to BASF Corp. He said Nymex needs to place tighter controls on intraday volatility, reduce the number of natural gas contracts any single trading entity can own and give more enforcement responsibilities to the Commodity Futures Trading Commission. Relaxed federal oversight has helped turn Nymex into an environment that is too friendly to speculators and "susceptible to manipulation," Cicio said.

Nymex Holdings, the parent of the world's largest energy futures exchange, earned $11.6 million in the first half of the year on revenues of $109.7 million. But judging by the $2 million paid for the most recent sale of a seat on the exchange in October, its members' earnings potential is even higher.

Average daily trading volume for natural gas futures has surged 16-fold over the past 10 years, according to Nymex data. By comparison, oil futures trading volume has doubled over the same period.

At the same time, commercial traders — utilities and industrial consumers who use futures markets to hedge against price movements in the spot market — are not as dominant in the market as they once were. The proportion of noncommercial traders such as hedge funds and individual speculators has trended steadily higher since 2001, according to CFTC data.

Critics say the proliferation of noncommercial trading is a major reason why natural gas prices have become so volatile.

Nachamah Jacobovits, a Nymex spokeswoman, said it's the reverse: Increased volatility is luring more traders to the market. "People who don't hedge get hurt," Jacobovits said. "There's no question that natural gas is a very volatile market," he said, but "we have a great deal of resources devoted to monitoring it."

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