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Impacts of Gas Market Manipulation

How it could work and affect prices

Our CEO, James Constant explains how gas market manipulation might work and how it could affect the prices your business pays.

Despite the scant detail provided thus far, this looks like another classic example of how financial instruments can be abused for the gain of a party (or parties).

Like any commodity, energy (and in this particular example, gas) can be traded in two ways: firstly, it can be traded as a physical commodity with a physical point of delivery; secondly, it can be traded as a function of price, with the aim to generate profit without the need for physical delivery.

It appears it is the second kind of trading that is under the spotlight.

The participants highlighted appear to be unidentified traders manipulating ICIS Heren in their role as a ‘price reporter’, recording the multitude of gas trades in any given period, and setting a benchmark price for the trades, and in turn therefore for the price of gas at a specific point of delivery.

It is this that is under the spotlight with particular reference to a single day in September where the price was seen to drop abnormally, raising suspicions, since confirmed by the whistle-blower.

I suspect that the particular issue is centred on traders betting on the direction or actual level of the ‘benchmark’ price and in some way manipulating trades and therefore ICIS Heren’s benchmark price to deliver a bigger win on a ‘bet’ than would have been possible if they had merely traded the commodity free from manipulation.

Allowing for a stretching analogy, it is a little like having a bet on the outcome of a football match, but also having lots of ‘in-play’ bets and it is those ‘in-play’ bets that cumulatively or singularly can return a greater sum than the bet on the outcome…and it is also easier to manipulate a throw in or corner than it is to fix a whole match.

How the Big 6 energy suppliers fit in is currently unknown. However in principle and in practice they are major traders in the gas market and even if they have the commodity to cover most or all of their supply needs, if they see an opportunity to trade this out at a premium price and buy back at a profit then they will happily take that option. And there is nothing inherently wrong in this. Indeed any business with access to generation or commodity can and will do this to optimise the return on their investment. In this context, gas is just another financial instrument – it just happens to have a physical commodity at its core.

From what we have seen so far this has been about a manipulation of trades downwards and so the direct impact on business energy prices is not clear. No doubt more information will come out as the investigation proceeds. However in principle if a low price marker frightened the market into a mass sell-off then it is not inconceivable that willing suppliers of gas would be scarce or empty of reserves, driving future prices up as demand outweighed supplies. It is interesting but by no means conclusive that in the immediate aftermath of the controversial date of 28th September we saw a drop in the gas price of some 2% and the month that followed saw an increase of 6%. Of course with the move into winter this cannot necessarily be attributed to foul play, however no doubt the regulator and the FSA will be keen to look into the subsequent price behaviours and their potential impact on the business energy market.

Happily, the domestic energy market is more insulated against individual price movements, due to the hedging strategies and uniformity of forecasting employed.

However, in direct contrast, the business energy market is very much exposed to even small fluctuations in price and if the resultant market price was indeed affected then thousands of businesses re-contracting in October will have been detrimentally affected.

October is a particularly busy month for the business energy market, as it is one of the most common dates for contracts to be up for renewal, increasing the number of businesses potentially affected.

If this was indeed the case it could not have come at a worse time for UK business with commodity costs increasing even without manipulation in an economy that is at best stagnating. Someone has clearly benefitted, but it’s equally clear that the average British business most certainly has not.



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