INSIGHT: US gas regulators feel political winds

14 April 2008 22:51  [Source: ICIS news]

By Stephen Burns

 

HOUSTON (ICIS news)--The downturn in the US housing market has been a relentless source of bad news for the chemical industry in recent years by damping down demand for a broad range of materials.

 

But the silver lining is starting to take shape: a renewed political will to support regulation that may ultimately address constant complaints about chronic manipulation in natural gas markets.

 

In contrast to its naphtha-based counterparts in other regions, the US chemical sector's dependence on natural gas as a feedstock should theoretically give it a smoother ride.

 

The US natural gas market is not directly impacted by the headlines about geopolitics that are habitually blamed for pushing gyrations in the crude price, one of the principle naphtha drivers.

 

Those big swings in crude often do not conform to supply/demand/inventory fundamentals in the oil market, leaving traders, observers and reporters alike to scramble for explanations.

 

Nor is there – at least not yet – a natural gas version of OPEC trying to tilt the liquefied natural gas (LNG) playing field, even if LNG had a more significant role in the US supply picture.

 

Quite the opposite, in fact: US natural gas imports are dominated by pipeline deliveries from Canada, one of the most politically stable neighbours an industrialised economy could hope for.

 

Likewise, US demand is a picture of relative stability. Total US consumption in 2007 of 23.054 trillion ft3 was down 1.2% from 2000, according to the Energy Information Administration (EIA).

 

Yet the price history paints an entirely different picture. Monthly average prices for industrial buyers of natural gas show that seasonal trends can run contrary to expectations, hurricane effects are counter-intuitive, and low-high ranges within a given year defy the fundamental supply-demand picture.

 

Many in the chemical industry have long argued that a key explanation for price volatility is that markets are being roiled by speculation and its pernicious twin, manipulation.

 

Calls for increased vigilance by regulators have been answered with a parade of cases against traders in the natural gas market over recent years, but the millions of dollars in fines – and occasionally, jail time – have never put to rest ideas that more could and should be done if only the political will existed, especially at the Commodity Futures Trading Commission (CFTC).

 

Which brings the story back to the housing market slump and a new phrase that injected itself into global consciousness from mid-2007 onwards: subprime mortgages.

 

Those mortgages, it turned out, helped fuel to dramatic rise in US real estate values this decade by creating buyers who should not really have been in the market at all.

 

The buyers were able to overcome problematic credit profiles with the help of greedy mortgage brokers exploiting what is now generally accepted as a lack of regulation.

 

Because the sub-prime mortgages had been repackaged and sold into secondary markets, the downturn in house prices in turn leap-frogged into the wider financial system and created turmoil that has fed the slide into recession.

 

In a US election year, that narrative is embraced by those on the left of the political spectrum, where there is a natural suspicion of the ability of markets to operate without pro-active oversight.

 

But even on the right, the need to be seen to be doing something means the push for tighter regulation is meeting less resistance.

 

Announcing on 31 March a "transformative" process to redraw regulation of the US financial system and markets, Treasury Secretary Henry Paulson was caught in the political paradox for economic conservatives.

 

"I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent...periods of financial market stress", Paulson said – before going on to unveil a massive overhaul to enable regulators to catch up with markets.

 

For the CFTC, the stakes in that overhaul are high. The regulator of US futures markets, which also claims some jurisdiction over physical markets that affect futures prices, may find itself swallowed up in a new super-agency that would also include the Securities & Exchange Commission (SEC).

 

"When the topic of regulatory structure comes up, people often rush to the assumption that the SEC and the CFTC should be merged," Paulson acknowledged.

 

"We agree that the realities of the current marketplace for securities and futures products make it increasingly difficult to rationalise a separate regulatory regime," he said.

 

That is music to the ears of critics like Peter Huntsman, president and CEO of US chemical producer Huntsman, who sees the CFTC as having too many ties to the exchanges it regulates and lacking the SEC's willingness to pursue mischief.

 

But the music is at best only an overture, with any substantive changes in regulatory structures years down the track. The CFTC itself called for a slow approach to reform, saying that initiatives already underway to better coordinate with the SEC should be given time to bear fruit.

The CFTC does appear to have read which way the political wind is blowing, though.

In February, it announced the formation of an advisory committee to hold public forums examining the regulatory issues swirling through US energy markets. Members of the new panel include energy industry representatives drawn from exchanges, producers, market users and consumers.

Arguably, that initiative could and should have been undertaken years ago, a lesson that the CFTC has apparently taken to heart.

In contrast to its deliberate and retroactive approach to dealing with energy markets, the regulator has decided to proactively address the current spectacular volatility in agricultural commodity markets before problems surface.

The CFTC will hold a public forum on 22 April that is "designed to gather information about whether the futures markets are properly performing their risk management and price discovery roles".

Topics up for discussion include the role of speculators, index funds and commercial hedgers, and the adequacy of transparency in the markets – a timely agenda given that food riots are capturing headlines around the world this week.

 

While US chemical producers may rue the slow arrival of the political wind, it may at least give some comfort to see the regulatory tide turning.

By: Stephen Burns
+1 713 525 2653

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly