Crude Oil Futures Speculator Crooks Drive Up Oil Prices and Cause Financial Crisis

[Guest human_*]

A presidential election year? As far as I know, NOTHING. The democrats are too busy investigating the republicans.

 

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I am trying to understand what you all are saying. My question is what can we do about it. Its costing me over $800 per week to keep my rig going. I do not know how much longer I can last before I am going to have to sell my truck.

[Guest human_*]

A presidential election year? As far as I know, NOTHING. The democrats are too busy investigating the republicans.

 

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I am trying to understand what you all are saying. My question is what can we do about it. Its costing me over $800 per week to keep my rig going. I do not know how much longer I can last before I am going to have to sell my truck.

[Guest Steve_*]

I will not be able to drive down to vote, because of the price of gas lol

[Guest String up the Greed]

It is good that our Congress wants to wait. Perhaps by November, gas will be over $6.00 and the country will vote to throw out those in greedy frakers that have blocked all attempts to fix this mess. I cannot believe that England and Dubai control our oil market. Why did we sell out?

[Guest BlingBling_*]

Big investors are free to run up oil futures contracts thanks in part to former Senator Phil Gramm. He is the Texas Republican who co-sponsored the Enron loophole in 2000.

[Guest Enron Ex]

Massive gambles being taken by new financial investors have allowed the commodities futures exchanges, especially in Chicago and New York, to function like a perfect casino.

[Guest Human_*]

Blingbling is partially correct; it was signed off by BILL CLINTON. It's the "Commodities Futures Modernization Act of 2000".

 

 

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Big investors are free to run up oil futures contracts thanks in part to former Senator Phil Gramm. He is the Texas Republican who co-sponsored the Enron loophole in 2000.

[Guest BlingBling_*]

Blingbling is partially correct; it was signed off by BILL CLINTON. It's the "Commodities Futures Modernization Act of 2000".

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Gramm's wife, Wendy Gramm was a member of Enron's audit committee, and also served on the company's of the Board of Directors. Phil Gramm was the second-largest recipient in the Senate of financial contributions from Enron, receiving $97,350 from the company between 1989 and 2001. Gramm legislated the surrender of the commission's authority over regulating Enron's energy futures contracts. Five weeks later, after leaving the commission, Gramm was working for Enron.

 

When George W. Bush was running for President, he made use of the Enron corporate jet fourteen times. Enron and its employees have contributed at least $736,800 to President Bush's political career--more than any other corporation. This year Congress made an attempt to reverse the Enron Loophole, but it was vetoed by President Bush in 2008.

 

Sen. Kay Bailey Hutchinson, R-Texas, who received $99,50.

 

Enron stockholders included Defense Secretary Donald H. Rumsfeld, senior Bush adviser Karl Rove, deputy EPA administrator Linda Fisher, Treasury Undersecretary Peter Fisher and U.S. Trade Rep. Robert Zoellick.

 

McCain acknowledged getting $9,500 in Enron contributions in two Senate campaigns.

 

Listen to the NPR story, "Our Confusing Economy, Explained"

http://www.npr.org/templates/story/story.p...toryId=89338743

[Guest August]

Look what the industry has done when given the opportunity to manage a global resource. They’ve totally mismanaged the entire system and should now be prosecuted and the industry nationalized and removed from the ‘open’ market. China and India do not trade in the open market, they go directly to the suppliers. Anything less than improving consumption efficiency is merely window dressings.

[Guest BlingBling_*]

Our Republican congress reduced our ability to monitor the markets and to identify speculators that where illegally using the markets to drive up their profits by virtue of their moving large amounts of wealth. so, Republicans and their cronies have made the conditions possible for them to increase their wealth and their monopoly on wealth as the rest of the country suffers.

[BlackSun]

Our Republican congress reduced our ability to monitor the markets and to identify speculators that where illegally using the markets to drive up their profits by virtue of their moving large amounts of wealth. so, Republicans and their cronies have made the conditions possible for them to increase their wealth and their monopoly on wealth as the rest of the country suffers.

 

Pointing fingers is going to get us nowhere. Investigations will cost more taxpayer dollars and take years of debate to actually figure who is to blame. I rather see our Congress give a one time immunity to all the parties involved and then switch the market from Dubai and Britain to America's control. In addition, all future contracts should be made transparent for public oversight.

[Guest Brenden Timpe]

U.S. Senator Byron Dorgan (D-ND) introduced legislation designed to put downward pressure on gas prices by curbing the rampant speculation taking place in the energy futures markets.

 

Dorgan’s legislation, called the “End Oil Speculation Act of 2008” orders the Commodity Futures Trading Commission (CFTC) to use its emergency authority to crack down on the root cause of the recent surge in energy prices – those who drive oil and gas prices to record levels by engaging in excessive speculation. The legislation sets out the specific requirements to force the CFTC to shut down the excess speculation.

 

The legislation:

 

Requires the CFTC to classify all trades as either “legitimate hedge trading” by commercial producers and purchasers of actual physical petroleum products, or, all other trades that would be classified as “non-legitimate hedge trades;

 

Require the CFTC to order an increase in margin requirements to 25% for the trades classified as non-legitimate hedge trades;

 

Requires the CFTC to revoke or modify all prior actions or decisions that prevent the CFTC from protecting legitimate hedge trades and discouraging speculative trades;

 

Requires the CFTC to convene an international working group of regulators to ensure the protection of petroleum futures market from excessive speculation and world wide forum shopping;

“This bubble of excess speculation in the energy futures market has driven up oil and gas prices well beyond that which is justified by supply and demand,” said Dorgan. “While these speculators are making money hand over fist, American families are suffering from record prices at the gas pump. To help our economy and bring some relief to American drivers, we must wring this speculation out of the market.”

 

“There is a 50 percent margin requirement for people when purchasing stocks, but only a five to seven percent requirement for those speculating in energy futures,” said Dorgan. “These speculators are using money they don’t have to buy oil they’ll never use, making money on both ends, and the American public gets stuck with the bill every time we fill up our tank.”

 

Dorgan’s legislation orders the CFTC to use all of its existing authority to investigate, regulate, monitor, report, and take immediate action against those who engage in excessive speculation.

 

“We are trading 20 times more oil than we take delivery of each day. The world uses about 86 million barrels of oil per day, yet trades approximately 1.5 billion barrels of oil per day,” said Dorgan. “This casino-like speculation is causing sky-high gas prices that hurt our economy and our families. The steep run up in prices is damaging our economy and is especially damaging to those who live in large rural states like North Dakota.”

 

“The price of fuel has reached crisis levels in this country, and there is no end in sight,” said Dorgan. “Immediate action is needed to reduce speculation and reduce energy costs in this country.”

[Guest JesseLee]

Watch closely who opposes this bill. Get ‘em in November ff their up for re-election.

[Guest Shawn in DC]

Here is another one for your list. Philipp Brothers was at one time the world's biggest commodities trader. It was later renamed Phibro and is now the commodities trading unit wholly owned by Citigroup Inc. Phibro LLC and subsidiaries conduct a global commodities trading and dealer business through offices in Westport (Connecticut), London, Geneva, and Singapore. Commodities traded include crude oil, refined oil products, natural gas, metals and various soft commodities. Phibro is an active participant in the OTC derivative and physical markets and makes extensive use of futures markets.

 

http://www.counterpunch.org/martens06212008.html

 

How a Shady Citigroup Subsidiary Secretly Makes Billions in the Oil Market

By Pam Martens, CounterPunch.

 

The company that Congress overlooked should have been an easy suspect. It launched the oil trading career of the infamous fugitive Marc Rich, pardoned by President Bill Clinton in the final hours of his presidency. It was at one time the largest oil and metals trader in the world. In the late '90s it bought up 129 million ounces of silver for legendary investor Warren Buffet's company, Berkshire Hathaway, in London's unregulated over-the-counter market. In 1990, it was one of the first entrants into an ill-fated Russian oil venture called White Nights. In 2005, while part of

Citigroup, the largest U.S. banking conglomerate perpetually scolded for obscene executive pay, it handed its chief and top oil trader, Andrew J. Hall, $125 million for one year's work. According to the Wall Street Journal, that was five times the pay package for Chuck Prince, CEO of the entire Citigroup conglomerate that year and $55 million more than the CEO of Exxon-Mobil.

 

Given this storied history and two years of congressional testimony on oil trading skulduggery, one would expect to find volumes of current information available about this oil trading juggernaut. Instead, this company's activities are so secret that its website, phibro.com, is a one-page affair and lists only the addresses, phone and fax numbers of its offices in the United States, London, Geneva and Singapore. No officers' names, no bios, no

history, no press releases. And while the Wall Street firms of Goldman Sachs and Morgan Stanley have been fingered by Congressman Bart Stupak, D-Mich., for gaming the system, Phibro has completely escaped scrutiny during a seven-year period when crude oil has risen an astonishing 697 percent.

 

Phibro is the old Philipp Brothers trading firm that has resided secretly and quietly on Nyala Farms Road in Westport, Conn., as a subsidiary of the banking/brokerage behemoth Citigroup since the merger of Traveler's Group and Citicorp (parent of Citibank) in 1998. Traveler's Group owned Phibro at the time of the merger. Despite the fact that Phibro has provided Citigroup with $2 billion in revenue over the past three years, the 205-page annual report for Citigroup in 2007 carries only the following one-sentence footnote on commodity income that acknowledges the existence of this company: "Primarily includes the results of Phibro Inc., which trades crude oil, refined oil products, natural gas, and other commodities."

 

Combing through government archives, the first noteworthy appearance of Phibro occurs on April 6, 2001, when the Wall Street law firm of Sullivan & Cromwell sent a letter to the Commodity Futures Trading Commission (CFTC), the federal regulator of oil and other commodity trading, acknowledging that it was representing "the Energy Group." The letter was noteworthy because it delineated just who had teamed up to grease the oil rigging in Washington: namely, two investment banks (Goldman Sachs and Morgan Stanley); a house of cards that would later collapse (Enron); a proprietary trading firm inside a Frankenbank (Phibro inside Citigroup); and two real energy firms (BP Amoco and Koch Industries).

 

What the Energy Group had long lobbied for and finally received from its federal regulator was the breathtaking ability to trade oil contracts and oil derivatives secretly in the over-the-counter (OTC) market, thus avoiding the scrutiny of regulated commodity exchanges, its CFTC regulator and Congress. The April 6, 2001, letter was essentially to say thanks and interpret the new rules as favorably as possible for the Energy Group.

 

Phibro LLC is a Delaware limited liability company and converted from Phibro Inc., a Delaware corporation, on June 30, 2006.

 

Corporate Headquarters

500 Nyala Farms Rd

Westport, CT 06880

USA

(203) 221-5800 / Tel

(203) 221-6760 / Fax

 

European Offices

6 Duke Street St James

London, SW1Y 6BN

United Kingdom

(44) 207 484 2500 / Tel

(44) 207 839 8774 / Fax

 

12 Rue du Port

1204 Geneva

Switzerland

(41) 22 316 1818 / Tel

(41) 22 310 9841 / Fax

 

 

Pacific Rim Office

9 Temasek Boulevard

# 43-01

Suntec Tower Two

Singapore 038989

(65) 6250-6088 / Tel

(65) 6250-6124 / Fax

[Guest LAW_*]

Ann Davis did a front page story in the Wall Street Journal on Andrew Hall, who runs Phibro. Go read it, it's full of wonderful details, like Hill's thousand-year-old castle in Germany, which recently housed a massive Schnabel exhibition. This smart speculator that has added zero real economic value except for his own pocket.

 

http://online.wsj.com/article/SB120414423054397257.html

 

Trader Hits Jackpot in Oil, As Commodity Boom Roars On

By Ann Davis

 

WESTPORT, Conn. -- The commodities market's historic surge is generating huge paydays on Wall Street. One of the biggest beneficiaries has been Andrew J. Hall, an enigmatic British-born trader who, five years ago, anticipated an important shift in the way the world valued oil -- and bet big.

 

Over the past five years, Mr. Hall's compensation has totaled well over a quarter-billion dollars, according to a Wall Street Journal analysis of securities filings and Mr. Hall's compensation structure. One of those years he out-earned his boss, the head of Citigroup Inc., about five times over.

 

Andrew Hall was born in Bristol, England. He earned an honors degree in chemistry from Oxford in 1973 and a master's in business administration from Insead, the French business school, in 1980. He held a variety of titles at British Petroleum from 1973 to 1979 and rejoined it after business school. He joined Phibro in 1982 as a crude-oil trader in London and rose through the ranks.

 

Mr. Hall, who is lives in Southport, Conn., with his wife and two children, also owns a dairy farm in Vermont, where he says he has "been known to get on a tractor and mow hay." He also collects contemporary art.

[Guest Do Something]

I cannot tell you how upset I am that speculator crooks can control a buck of oil for a nickel, and you know they have no intension of ever taking delivery of a single barrel of crude. What really gets my goat is the news networks put this major story on the back burner behind Madonna and A-Rod. I wish the FCC would revoke their license.

[Guest Country Boy]

How much money do these people need to make? They can already take care of 50 generations of their family. I could survive well with only a million dollars.

[jmn0730]

I completely agree with how crooked this whole system is. For us to not know exactly who is purchasing from these banks makes us vulnerable to many other things. I think the monitoring needs to increase and more strict.

[Guest FedUp]

I completely agree with how crooked this whole system is. For us to not know exactly who is purchasing from these banks makes us vulnerable to many other things. I think the monitoring needs to increase and more strict.

 

I did not know that banks were also involved in the commodity market exchange scandal? Can you tell me which ones? I don't want to have my money in that bank.

[Guest Enron Ex]

Congressional oversight of commodity futures trading is under the jurisdiction of the House Agriculture Committee, chaired by Congressman Peterson. The Farm Bill, enacted into law earlier this month over the President’s veto, reauthorizes the chief regulator of these markets, the Commodity Futures Trading Commission, through 2013.

 

Oral Testimony of Acting Chairman Walter Lukken Before the House Appropriations Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies

July 10, 2008

 

Madam Chairwoman, Congressman Kingston, and other members of the subcommittee, thank you for inviting me to testify on the role of the CFTC in overseeing the commodity futures and options markets.

 

The CFTC’s mission is twofold. First is protecting the public and market users from manipulation, fraud, and abusive practices. Second is promoting open, competitive and financially sound markets for commodity futures and options. These mandates are crucial because prices in the futures markets impact the cost of a loaf of bread, the price of a gallon of gas, and the interest rate on a student loan. If the futures markets fail to work properly, all consumers may be impacted.

 

We are quite aware that many of these markets have recently been reflecting prices that are putting a considerable strain on American families and businesses. Although the Commodity Exchange Act does not give our agency the authority to set prices, our people work extremely hard to ensure that the futures markets are working properly and prices are reflecting economic factors rather than manipulative forces.

 

As you know, the futures markets have changed dramatically in the last decade. Since 2000, volume on U.S. exchanges has grown six-fold as traders increasingly seek the price certainty and clearing benefits of the regulated futures markets.

 

The growth in the regulated marketplace has been scrutinized lately—and appropriately so—as prices in crude oil and agricultural commodities have climbed. Specifically, concerns have been raised recently regarding the role of speculators and index traders in commodity markets. Speculation has played a crucial role in the functioning of the U.S. futures markets since their founding more than 150 years ago. Without speculators, the futures markets would not be able to operate properly. Commercial participants cannot hedge their activities without someone willing to take the other side of the transaction. In futures markets, this opposite role is often taken by speculators. The liquidity provided by speculators has tended to lower the costs of hedging to the benefit of commercial participants in the markets.

 

Nevertheless, our agency recognizes that any participant in the markets with enough power, including speculators, can detrimentally affect the functioning of the markets. Accordingly, our Act requires all traders of sufficiently large size to report their futures positions to the CFTC daily. This information enables our surveillance economists to monitor large traders to ensure that no one is attempting to manipulate the futures markets. The amount and detail of trade data collected at the CFTC is unique among financial regulatory agencies and this system has proven to be extremely effective in the proper policing of this market.

 

As the futures markets have changed, the CFTC has evolved to meet new challenges. In light of the recent market developments and the impact of high prices on consumers, the CFTC has embarked upon a series of steps to ensure greater transparency, implement tighter controls, and gather more energy market information. The Commission recently announced an agreement with the United Kingdom Financial Services Authority to expand information-sharing concerning crude oil contracts of Ice Futures Europe in London that is linked to the U.S. NYMEX crude benchmark. The CFTC also required the imposition of position limits and accountability levels on these products equivalent to U.S. standards. Additionally, we called for additional information from swaps dealers regarding their index trading and a review of whether additional controls or classifications for these traders are needed. And the agency also announced the existence of an ongoing seven-month nationwide crude oil investigation.

 

More recently, the CFTC formed an interagency working group with the Federal Reserve, the Treasury Department, the Securities and Exchange Commission, the Department of Energy, and other agencies to study investor practices, fundamental supply and demand factors, and the role of speculators and index traders in the commodity markets. This group is making significant progress on completing a report to Congress and we hope to provide an interim report on the crude oil markets in the coming weeks.

 

Regulatory evolution and informed responses to market conditions are keys to effective market oversight in this challenging global marketplace. The CFTC and its regulatory approach have evolved along with the futures markets, and the agency has pursued its mission while operating at historically low staffing levels. Over the last year, the CFTC worked with Congress to legislatively close the so called ‘Enron Loophole’ as part of the recent Farm Bill that provides the agency the data and authority to oversee these electronic energy markets. This is clearly a busy and challenging time for the CFTC and I believe the agency has risen to the occasion. But we simply cannot sustain the current workload – let alone what is likely in the future – under our current budgetary limitations.

 

I am appreciative of this subcommittee approving an appropriation of 135 million dollars for the CFTC in Fiscal 2009. This is a strong step during this tight budgetary time. With the passage of new authorities over exempt markets and the additional responsibilities being currently asked of this agency, the Senate Appropriations subcommittee yesterday approved a mark of 157 million to meet these growing oversight needs.

 

Commodity Futures Trading Commission

Office of External Affairs

Three Lafayette Centre

1155 21st Street, NW

Washington, DC 20581

202.418.5080

[Guest Enron Ex]

Testimony of Greg Zerzan

Counsel and Head of Global Public Policy

International Swaps and Derivatives Association

July 10, 2008

 

The Purpose and Role of OTC Derivatives in the Economy

 

OTC derivatives are used for a variety of risk management purposes. Initially developed in the 1980s, OTC derivatives have quickly become a core component of the risk management operations of financial institutions, manufacturers, producers, multinational corporations and investors both in the US and around the world. OTC derivatives are privately negotiated contracts, with the material terms of a transaction worked out between the parties. In this respect they differ significanly from exchange traded futures and options, which are standardized and fungible instruments to offset through the purchase of a contract with the opposite exposure.

 

In the energy commodity space OTC derivatives are used by a broad segment of market users looking to manage risks related to future price movements of energy. For instance, a large producer that is exposed to the price of oil through normal costs like fuel and the price of fertilizer can hedge its risks by entering into a swap agreement whereby it agrees to pay a fixed amount of money on a specified quantity, for instance $140 a barrel, over a specified period in exchange for receiving the floating price of crude over that same time. In this way the producer will guarantee that its economic exposure is no more than $140 a barrel and can budget its future operations on that basis. Likewise a utility company that relies on natural gas to power its generators can lock-in the future price of the commodity by entering into a swap agreement with a counterparty such as a bank or investment firm that is better equiped to deal with the risk of floating prices.

 

OTC derivatives were invented to allow companies to mitigate price shocks by passing on those risks to others that have the opposite exposure, or are better suited to manage them. These risks can be managed through custom-tailored contracts exactly suited to the company risk management needs.

 

In some cases OTC derivatives are used to gain exposure to some underlying reference asset. For instance an institutional market participant such as a pension fund or university endowment might utilize an OTC derivative to benifit from the increase in the price of a basket of stocks or commodities. The reasons an institutional market participant might prefer to use OTC derivative instead of futures or stocks can vary, but could include such factors as costs, the ease with which a swap agreement can provide diversification, legal constraints on its ability to invest directly in certain asset classes, or the need to custom tailor a transaction for portfolio management purposes. Cost benefits are an especially important consideration; an investor can use a total return swap to access exposure to an underlying commodity without having to purchase and manage a bundle of future contracts with different delivery dates. Equally important is that OTC derivitives are cash settled, meaning an investor need not avoid physical delivery by purchasing offsetting futures contracts (and incurring those transaction costs as well).

 

OTC derivatives play a critical role in the global economy, and the markets are international in scope. However, despite the fact that OTC derivatives were first created in the United States, London has become the center of the global OTC dervatives business with roughly 43 percent of the world's daily turnover occurring there.

[Guest Enron Ex]

Commodity derivative market participants can be divided into three categories.

 

The first category is "commercial" participants, which include oil producers along with oil consumers such as airlines and refineries. Commerical participants often, but not always, use derivatives to hedge their exposure to prices and thereby reduce risks.

 

The second category is non-commerical participants, which includes hedge funds, pension funds, and commodity trading advisors. Non-commericals are often identified as speculators, that is, participants that seek to take on risk in order to benefit from price increases or decreases.

 

The third category is intermediaries, also known as dealers, which consist of banks and other financial firms as well as energy trading subsidiares of energy producers and utilities. Intermediares stand between hedgers and speculators in order to make a market.

 

All three types of participants act as both hedgers and speculators at different times.

[Guest Lemonhead]

I wish the government would investigate the large speculators trading activity and volatility in the U.S. Crude Oil futures market. Opec Secretary General Abdalla Salem El-Badri said that there was no shortage of crude oil, brushing aside US calls for higher output to dampen runaway prices.

 

"There is clearly no shortage of oil in the market," he said.

 

The turmoil in some global equity markets and the considerable depreciation in the US dollar have encouraged investors to seek better returns in commodities, particularly in the crude oil futures market. This has driven prices higher," he said. This bull run in crude has been driven by "investor interest" in commodities.

 

The investigators are part of the problem, and don''t think for a minute they are not. They are a corrupt worm that has burrowed deep within the bowels of our once proud government and festered into a diseased mutant. The government under the Bush regime planned this action a long time ago. The first step was to get a war going, continue to propagandize the people, and build lie upon lie. Scare the hell out of the population with constant threats of terrorism which they continue on to this day. There attempting at this moment to say Al Qaeda and Iran are in cahoots. This is another tactic. They want to pressure the idiots to say go ahead and drill in the Arctic Wildlife Refuge, we have to have it even though it''s a years worth of oil. Idiots will go along with it, the oil companies will continue with the price rise no matter how much oil is discovered. They want to get as rich as possible before alternate energy, which we already have, is unleashed on the public.

[Guest Enron Ex]

One of the benefits provided by [the current] regulated exchanges is the anonymity they provide to traders. regulated exchanges Futures markets reveal the prices market participants pay, not their motivation in making trades. Measures which seek to remove that anonymity could make traders seek markets which protect their ability to not reveal their motivations or individual market positions.

[Guest Enron Ex]

TESTIMONY OF MICHAEL COMSTOCK,

ACTING DIRECTOR FOR THE CITY OF MESA, ARIZONA GAS SYSTEM

ON BEHALF OF THE AMERICAN PUBLIC GAS ASSOCIATION

BEFORE THE HOUSE AGRICULTURE COMMITTEE

 

JULY 10, 2008

 

Although the additional authorities which have been provided to the CFTC under Title XIII of the 2008 Farm Bill will provide the CFTC with significant additional tools to respond to the issues raised by this hearing (at least with respect to the energy markets), we nevertheless believe that it may be necessary for Congress to provide the CFTC with additional statutory authorities. We are doubtful that the initial steps taken by the reauthorization legislation are, or will be, sufficient to fully respond to the concerns that we have raised regarding the need for increased transparency. In this regard, we believe that additional transparency measures with respect to transactions in the Over-the-Counter markets are needed to enable the cop on the beat to assemble a full picture of a trader’s position and thereby understand a large trader’s potential impact on the market.

 

We further believe, that in light of the critical importance of this issue to consumers, that this Committee should maintain active and vigilant oversight of the CFTC’s market surveillance and enforcement efforts, that Congress should be prepared to take additional legislative action to further improve transparency with respect to trading in energy contracts and, should the case be made, to make additional amendments to the Commodity Exchange Act, 7 U.S.C. §1 et seq. (“Act”), to make changes in the administration of speculative position limits in order to ensure the integrity of the energy markets.

 

Speculators’ Effect on the Natural Gas Market

 

As hedgers that use both the regulated futures markets and the OTC energy markets, we value the role of speculators in the markets. We also value the different needs served by the regulated futures markets and the more tailored OTC markets. As hedgers, we depend upon liquid and deep markets in which to lay off our risk. Speculators are the grease that provides liquidity and depth to the markets.

 

However, speculative trading strategies may not always have a benign effect on the markets. For example, the recent blow-up of Amaranth Advisors LLC and the impact it had upon prices exemplifies the impact that speculative trading interests can have on natural gas supply contracts for local distribution companies (“LDCs”). Amaranth Advisors LLC was a hedge fund based in Greenwich, Connecticut, with over $9.2 billion under management. Although Amaranth classified itself as a diversified multi-strategy fund, the majority of its market exposure and risk was held by a single Amaranth trader in the OTC derivatives market for natural gas.

Amaranth reportedly accumulated excessively large long positions and complex spread strategies far into the future. Amaranth’s speculative trading wagered that the relative relationship in the price of natural gas between summer and winter months would change as a result of shortages which might develop in the future and a limited amount of storage capacity. Because natural gas cannot be readily transported about the globe to offset local shortages, the way for example oil can be, the market for natural gas is particularly susceptible to localized supply and demand imbalances. Amaranth’s strategy was reportedly based upon a presumption that hurricanes during the summer of 2006 would make natural gas more expensive in 2007, similar to the impact that hurricanes Katrina and Rita had had on prices the previous year. As reported in the press, Amaranth held open positions to buy or sell tens of billions of dollars of natural gas.

 

As the hurricane season proceeded with very little activity, the price of natural gas declined, and Amaranth lost approximately $6 billion, most of it during a single week in September 2006. The unwinding of these excessively large positions and that of another previously failed $430 million hedge fund—MotherRock— further contributed to the extreme volatility in the price of natural gas. The Report by the Senate Permanent Committee on Investigations affirmed that “Amaranth’s massive trading distorted natural gas prices and increased price volatility.”

 

Many natural gas distributors locked-in prices prior to the period Amaranth collapsed at prices that were elevated due to the accumulation of Amaranth’s positions. They did so because of their hedging procedures which require that they hedge part of their winter natural gas in the spring and summer. Accordingly, even though natural gas prices were high at that time, it would have been irresponsible (and contrary to their hedging policies) to not hedge a portion of their winter gas in the hope that prices would eventually drop. Thus, the elevated prices which were a result of the excess speculation in the market by Amaranth and others had a significant impact on the price these APGA members, and ultimately their customers, paid for natural gas. The lack of transparency with respect to this trading activity, much of which took place in the OTC markets, and the extreme price swings surrounding the collapse of Amaranth have caused bona fide hedgers to become reluctant to participate in the markets for fear of locking-in prices that may be artificial.

 

Recently, additional concerns have been raised with respect to the size of positions related to, and the role of, passively managed long-only index funds. In this instance, the concern is not whether the positions are being taken in order to intentionally drive the price higher, but rather whether the unintended effect of the cumulative size of these positions has been to push market prices higher than the fundamental supply and demand situation would justify.

 

The additional concern has been raised that recent increased amounts of speculative investment in the futures markets generally have resulted in excessively large speculative positions being taken that due merely to their size, and not based on any intent of the traders, are putting upward pressure on prices. The argument made is that these additional inflows of speculative capital are creating greater demand then the market can absorb, thereby increasing buy-side pressure which results in advancing prices.

 

Some have responded to these concerns by reasoning that new futures contracts are capable of being created without the limitation of having to have the commodity physically available for delivery. This explains why, although the open-interest of futures markets can exceed the size of the deliverable supply of the physical commodity underlying the contract, the price of the contract could nevertheless reflect the forces of supply and demand.

 

APGA commends this Committee for its focus on the possible impact speculative investment has on the price of natural gas and other energy commodities and for asking these tough questions. With energy prices at their current high levels, consumers should not be forced to pay a “speculative premium.” However, APGA is not in a position to determine which of the above two views is correct. More significantly and profoundly disturbing, because of limitations with respect to transparency of trading in these markets, the data and facts are unavailable that would enable market observers, including both the regulators and the public, to make a reasoned judgment about this issue.

 

As we noted above, as hedgers we rely on speculative traders to provide liquidity and depth to the markets. Thus, we do not wish to see steps taken that would discourage speculators from participating in these markets using bona fide trading strategies. But more importantly, APGA’s members rely upon the prices generated by the futures to accurately reflect the true value of natural gas. Accordingly, APGA would support additional regulatory controls, such as stronger speculative position limits, if a reasoned judgment can be made based on currently available, or additional forthcoming market data and facts, that such controls are necessary to address the unintended consequences arising from certain speculative trading strategies or to reign in excessively large speculative positions. To the extent that speculative investment may be increasing the price of natural gas or causing pricing aberrations, we strongly encourage Congress to take quick action to expand market transparency in order to be able to responsibly address this issue and protect consumers from additional cost burdens.