When Energy Speculators Move the Market

Bethany McLean’s interview with Brian Hunter talks a lot about speculators like Hunter driving prices in the natural gas market. Everybody seems convinced that can happen, although there’s disagreement about whether it’s illegal.

It’s predictable enough that US politicians would blame Hunter for raising gas prices; what’s less predictable is that the Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC) would do so too. And then there’s what McLean calls "the Keystone Kops-like quality to the proceedings against Hunter": the regulators are actually accusing him of illegally driving gas prices down, not up.

In any case, the traders themselves, including Hunter, believe that speculators can and do move prices:

Other traders believed that Hunter’s positions were so large that they were influencing prices. The PSI noted in its report that "many traders were reluctant to take positions opposite Amaranth, regardless of their view on market fundamentals, due to Amaranth’s demonstrated ability to affect natural-gas prices through large trades." …

"The law is clear," [Hunter] says. "You have to have an element of fraud or deceit, because anyone who trades a large position is going to move the price. The price moves because of large sellers and buyers! It’s ridiculous to say that if a person trades believing he’s going to move the price, that’s illegal."

What does this mean for the ongoing argument as to whether speculators are responsible for high oil prices? If one person making big trades can move the market, then surely a large number of speculators all independently betting in the same direction could do the same thing, and possibly more sustainably, to boot.

The way I see it, a trader, or a group of traders, can indeed move the market they’re trading, at least in the short term. But it’s much harder to move the spot market, and no one has managed to demonstrate with any credibility that Hunter did that. And it’s harder still to drive the spot market steadily upwards over the course of months and years. For that, you need fundamentals, not technical factors like futures-market activity.

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