Gas Price Fixing Investigation Sparked by Bank Trades

Dollars

One of the banks being investigated over the Libor lending rate scandal was behind some of the unusual deals that triggered a separate inquiry into suspected attempts to manipulate the wholesale gas price.

US investment bank Citigroup has confirmed that traders in its London office made two of a series of six gas deals that prompted inquiries by the Financial Services Authority and the energy watchdog, Ofgem.

The sales were made around the "window" in which so-called price reporting agencies set the benchmark price for gas. In both deals, late in the afternoon of 28 September, Citigroup sold gas at 58.00p per therm – substantially below the price of other deals earlier in the day and later.

Earlier this month, Seth Freedman, an employee of price-setting firm ICIS Heren, went public in the Guardian with concerns about what he feared were widespread attempts to manipulate the wholesale gas market. He said his suspicions were aroused by the series of mysteriously underpriced deals on 28 September, a key day in the gas calender.

After Freedman raised the alarm, ICIS Heren expressed concern that the 58p trades could indicate market manipulation and reported it to Ofgem last month.

It has since emerged that another price reporting agency, Platts, which takes the temperature of the market at around the same time of day, decided that a more appropriate price for gas was 59.10p and declared that in its daily roundup.

A third agency, Argus, said it also set a higher benchmark figure for the day, concluding that the series of 58p trades was "unrepresentative of prices at the close".

The involvement of a bank in unusual gas trades will raise concerns about speculation in non-financial markets but may be a relief to Britain's beleaguered energy firms, who have all denied involvement in attempts to manipulate gas prices. The identity of the companies that sold the four other consignments of gas at 58p on 28 September are unknown. FSA attention is likely to be centred on who first posted at this rate. It is understood that Citigroup was not responsible for the first deal.

The US-based bank, whose global head of commodity trading is based in London, said it was not trading on its own behalf. "Citi's activity in the natural gas market on 28 September was related to client activity, and all Citi trades were completed at levels consistent with the context of the market at the time they were executed," a bank spokesman said.

"Citi provides a variety of services to assist corporate clients in managing future cash flows. As a function of providing these services, Citi participates in a number of commodity markets, including the market for natural gas," he added.

There is no suggestion at this stage that Citigroup has acted illegally or improperly, but the fact that it, along with many other top names, has been linked with the Libor interbank lending rate will increase concerns.

Last December, Japan's Financial Services Agency found that two ex-Citi employees in Tokyo had tried to pressure colleagues and employees at other banks involved in the rate-setting process for the Japanese equivalent of Libor, the Tokyo Interbank Offered Rate. The bank wrote off $50m associated with this activity, which came to light after a Citi trader in London reported it.

Barclays, another bank at the centre of the Libor scandal, is trying to fight off a $480m fine from a US regulator for allegedly trying to manipulate the Californian electricity market.

In a Commons debate last month after the market-rigging allegations first surfaced, Labour MP Frank Dobson said the involvement of hedge funds and banks in the gas market had turned it into "nothing more than a speculative racket."

The major energy suppliers have all issued statements that their traders operate under strict guidelines and would not be involved in market manipulation.

But an industry source whose employer is active in these markets, who demanded anonymity, revealed that one of the six lots of gas sold for 58p on 28 September 28 was bought by Russian energy giant Gazprom. A spokesman for Gazprom Marketing & Trading in London said it did not engage in "malpractice" in wholesale gas markets. "We have robust governance and compliance policies and procedures in place, which are reviewed regularly. Our trading desk acts in line with such policies and follows the relevant and applicable market rules wherever we trade."

The state-owned Moscow group is known to have its own concerns about the way an increasing number of long-term gas contracts have had their prices tied to short-term "spot" or "hub" prices as drawn up by the price reporting agencies.

Sergeyi Komlev, head of contract structuring and price formation at Gazprom, told the Interfax news agency in February: "Hub prices can easily be manipulated. Relatively small additional values of gas dumped on the market could bring day-ahead prices down. The losses from dumping by a cartel of buyers will be compensated next day with a profit, when a lower day-ahead price from a previous day devalues the entire supply portfolio, which is unacceptable for gas supplier."

The price reporting agencies have also recently been under fire over the different methodologies they use.

Concern about the way the over-the-counter (OTC) gas trading is reported has been raised by the discrepancy between the way the PRAs reported the 28 September closing price. Platts said it was 59.10p, while Argus said it was 58.50p and ICIS Heren said 58.25p.

Following the Guardian's original revelations about the ICIS approach to Ofgem, Argus released the following statement justifying its price of 58.50p for 28 September: "On the day in question, Argus excluded the allegedly manipulative trades as unrepresentative of prices at the close. Argus price reporters collate a broad range of evidence in order to exercise informed editorial judgment, rather than relying mechanistically on transaction data – which in this case were the vehicle of the alleged attempt at manipulation."

Powered by Guardian.co.ukThis article was written by Terry Macalister, energy editor, for The Guardian on Thursday 6th December 2012 20.56 Europe/London

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