US natural gas trade still struggling after Enron
By Joseph Silha NEW YORK, Feb 24 (Reuters) -
Fewer players and volatile prices have dominated natural gas trading over the past two years, as new players struggled to fill a void after Enron and other big energy marketers pulled out, industry sources said. "We're missing the marketers. It's not only a question
of thinning out the number of traders, but it's the kind of traders that are left. Not any one of them has been able to duplicate the mix of paper trading with a background portfolio of hard assets," said Jan Stuart, vice president at Fimat USA Inc., a futures broker-dealer in New York. Enron Corp.'s 2001 bankruptcy triggered investigations and credit downgrades that raced through the industry, forcing some to scale back trading operations or exit the business altogether. While speculative hedge funds, investment banks and local, or independent, traders have moved in to offset some of the lost liquidity, activity on the New York Mercantile Exchange is still well below 2002 peaks.NYMEX gas futures trade last year dropped more than 20 percent from 2002's record volume to just over 19 million contracts. And open interest, the number of long and short contracts outstanding, is down to about 320,000 lots, after peaking at more than 575,000 in April 2002. NEW CAST Industry experts said the new cast of players, while adding market liquidity, has yet to make up for the loss of reliable counterparties, leaving huge price disparities between cash and futures markets and from one region to the next. In late December, January futures expired at nearly 70 cents per mmBtu over the daily Henry Hub cash price, a spread that would have been unthinkable when big marketers like Aquila Inc.
or Dynegy Inc. were still actively trading. "There's still a lot of liquidity at the (Henry) Hub, and some of the bigger market areas like Chicago are still relatively well traded, but liquidity has dropped off at a lot of other points. Most commodities don't have 50 pricing points," said David Gabriel, president of Cargill Inc.'s power and gas markets unit in Minneapolis. Henry Hub, a key natural gas pipeline interchange in Louisiana, is the standard delivery point for gas futures. Enron and other big marketers dealt with a broad mix of players from producers to end-users and were well placed to take either side of a trade.While some majors like BP Plc and ChevronTexaco Corp. have expanded their marketing efforts on the physical side, the gap is still obvious to some who noted that Midwest prices, at times this winter, slipped to about a dollar below Henry Hub versus a more normal discount of 20 cents to 30 cents. "There still aren't a lot of coast-to-coast marketers around. It's a thin crowd," said one former Enron trader. Investment banks have stepped in on the financial side, offering swaps and options, but many are still hesitant to get involved in physical deals or cut deals longer than two or three years, a useful tool for manufacturers or power generators looking to hedge long-term fuel costs.
VOLATILITY Some experts also said the changes have created more volatile prices, noting a recent spate of swings of 40 cents or 50 cents. "I think higher volatility has been the case (without the marketers). Fewer buyers and sellers means wider bids and asks, and less efficient pricing. I don't think the people moving in have been able to fully replace the people who left," said Stephen Smith of Stephen Smith Energy Associates, a Mississippi-based energy consulting firm. But not all industry experts agreed. "You could make the claim that as prices move higher, volatility tends to increase. I think the high price of energy is due more to the decline in the dollar than any lack of efficiency," said Joe Terranova, director of trading at MBF Clearing Corp.
in New York.