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Surge in Natural Gas Prices Brings Fear of Sharply Higher Heating Costs

by Josef Hebert, Canadian Press,, December 16, 2003

WASHINGTON (AP) - A surge in natural gas prices is raising fears of sharply higher heating costs this winter and has prompted a demand in the U.S. Congress for an investigation into possible price-gouging and market manipulation.

Natural gas prices, on both the spot and futures markets, have soared nearly 50 per cent since late November. The spot price on a key trading centre Tuesday was $6.59 US per thousand cubic feet, compared with $4.45 on Nov. 25, an increase of 48 per cent. Industrial users of natural gas have called for an investigation into possible market abuses. Senator Orrin Hatch (R-Utah), chairman of the Senate judiciary committee, promised hearings on the issue.

"We must determine once and for all if these price surges are the result of market forces or if there continues to be price manipulation," said Hatch.

He said he couldn't understand how normal market forces could cause a 50 per cent jump in price so quickly, when supplies appear adequate.

Last week, the U.S. Energy Department said natural gas supplies remained at nearly three trillion cubic feet, slightly above the five-year average for this time of year, when the heavy heating season approaches.

Analysts said a combination of events has spooked the market, including an onslaught of severe weather in the Northeast and Midwest and the memory of similar conditions a year ago when an unexpected cold spell caused a sudden drop in U.S. supplies and soaring prices.

Energy Secretary Spencer Abraham said Tuesday that weather has been a factor in the price surge, but "it may not be the only factor."

Still, Abraham cautioned against "premature finger-pointing" and warned of continued price volatility in natural gas markets if production is not increased. While current stocks appear to be adequate they are not at comfortable levels, said Abraham.

Analysts said that two recent weeks of higher-than-expected natural gas demand also led traders, who thought prices would moderate this winter, to shift gears and move to cover any potential losses, driving up prices.

Both the Federal Energy Regulatory Commission and the Commodity Futures Trading Commission are keeping a close watch on natural gas markets, but neither agency has indicated anything illegal going on so far.

"We are keeping a close watch. We watch the markets on a regular basis. We're are certainly aware of the situation," said FERC spokesman Brian Lee.

But some analysts argue there is no reason for gas prices to have increased so rapidly in recent weeks.

"Traders are hyping the markets. There are producers that are hyping the potential shortages. ... I don't want to call it a conspiracy, but all of these players are operating in concert," said Fadel Gheit, senior energy analyst at Oppenheimer & Co.

Others say the market only reflects the uncertainty about supplies because a sudden cold spell could quickly erase the supply cushion now in place. That's what happened last winter, causing prices to soar over $6 US a thousand cubic feet.

A few years ago natural gas wholesale prices were in the $3 range.

"The bottom line is you've got a jittery market." said Paul Wilkinson, an economist for the American Gas Association, which represents gas utilities.

And the recent price increases on the wholesale markets - both spot and for gas being delivered later this winter - will translate into higher heating costs to millions of Americans who rely on the fuel.

"There's no question. ... the prices today will get passed on," said Wilkinson, speaking for the gas utility retailers. "We're just, in a sense, a middleman."

Earlier this year, the Energy Information Administration estimated that average heating costs for families using natural gas will be about six per cent higher this winter, or about $850 US for the heating season. But that assumed a normal winter and wholesale gas prices of about $5 a thousand cubic feet.

David Costello, an EIA economist, said a more recent estimate put winter heating costs at about 10 per cent higher than last winter, but that estimate did not take into account the latest price surge.