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Natural gas: Information forces gas prices the wrong way

It’s easy to see why Brian Hunter of Amaranth notoriety – and so many others – were caught long of natural gas. The prices of natural gas have risen dramatically since 2000. But how much of that increase has been due to underlying supply and demand?

Increases in natural gas prices per thousand cubic feet
2000 2005 Increase
Wellhead $3.68 $7.51 104.10%
Imports $3.95 $8.41 112.90%
City Gate $4.62 $8.64 87%
Industrial $4.45 $8.49 90.80%
Electric Power $4.38 $8.45 92.90%
Commercial $6.59 $11.56 75.40%
Residential $7.76 $12.81 65.10%
Source: Energy Information Agency, Department of Energy, July 2006, taken from the Sonecon report

A report by Robert Shapiro, chairman of economics consultancy Sonecon and Nam Pham shows there are flaws in the pricing of the natural gas index that allow for manipulation. “Federal regulators have documented a series of practices by companies and traders resulting in price manipulations,” says the report. The most classic form involves simultaneous buying in futures and spot markets. “A manipulator acquires a large futures position and then goes into the current or near-term market to buy enough natural gas to push up the price. The increase in the current or near-term price of natural gas raises the price of futures contracts, which can then be sold at a profit without driving the price back down,” says Shapiro.

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