Last week four Midwestern state attorneys general released a report on natural gas markets that concluded that market fundamentals could not alone explain high natural gas prices. A press release says:
In their discussions of market dynamics, the Attorneys General said they found greatly divergent opinions and contradictory explanations for the recent roller-coaster of prices. But they emphasized that a closer look at the physical market for natural gas points to the conclusion that supply and demand fundamentals do not explain the price increases.
The study and the Attorneys General say a significant contributing factor has been a huge influx of money into largely unregulated financial markets, reinforcing the upward spiral of prices by increasing volatility and risk, and creating uncertainty. The lack of transparency in those speculative markets hinders effective review as well, they said.
At the March 16 open meeting of the Federal Energy Regulatory Commission, Chairman Joseph Kelliher asked staff from the agency’s office of market oversight for an assessment of the report. The staff, it turned out, didn’t have much nice to say about the report: it relied on outdated forecasts based on faulty assumptions, it attributed to market misbehavior price differences resulting from erroneous estimates, it reported gas drilling activity has been flat when in fact it has been growing in response to higher prices, and it understated the effects on Hurricanes Katrina and Rita on gas supply and overstated the effects on gas demand. Those comments are some of the highlights, but there were more.
Commissioner Nora Brownell made reference to reports by the Commodity Futures Trading Commission and by NYMEX, both examining the role of speculators in the gas futures market. FERC staff commented on the CFTC report, but ignored the NYMEX study. Good idea, the NYMEX study is inadequate and shouldn’t be relied upon. The CFTC report is much, much better, but for all of its analytical sophistication and wealth of data, it doesn’t quite get at the some of the broader issues it wants to address – for example, finding that non-commercial traders maintain holdings for longer periods than commercial participants, but the data doesn’t include the kind of intra-day market trades that create the most concern about speculation.
You can see the FERC staff smackdown – uh, I mean analysis – of the Midwest AG’s report on the meeting webcast archive at http://www.capitolconnection.gmu.edu/ferc/ferc.htm. Find the March 16 meeting on that page; the discussion of the Midwest AG’s report begins at about 34 minutes, 50 seconds into the meeting, and lasts for about 35 minutes.
The Midwest AG’s report, “The Role of Supply, Demand and Financial Commodity Markets in the Natural Gas Price Spiral,” [PDF] is available from www.iowaattorneygeneral.org. (Press release.)
FERC’s own assessment of market conditions can be found on their Winter Energy Outlook 2005–2006 page.
The CFTC report: “Price Dynamices, Price Discovery and Large Futures Trader Interactions in the Energy Complex,” [PDF] April 28, 2005. (Press release.)
The NYMEX report: “Review of Recent Hedge Fund Participation in NYMEX Natural Gas and Crude Oil Futures Markets,” [PDF] March 1. 2005.