Gas Market Manipulation

backfoot

steve-L wrote: »

He is correct..... in the lack of a direct link to consumer prices.

Thanks steve,

The bit above I don't fully understand.

If these trades affect the day end price on which contracts are settled, how can there be no long term link to end prices?

In the long run, don't all these trades feed down through wholesale gas sellers to Supplier buyers? If the market price is deflated or inflated, then we have seen the BG CEO explain that they simply take their wholesale cost then add their own Supplier costs plus £50 per customer (dual fuel)profit to establish the end price.

At no stage did he say,that BG would suffer the loss of any 'gambling' on the gas market and reduce the £50 profit per customer.

Why aren't we affected?

p.s. if we are not affected what is the purpose of all these trades?

steve-L

backfoot wrote: »

Thanks steve,

The bit above I don't fully understand.

If these trades affect the day end price on which contracts are settled, how can there be no long term link to end prices?

In the long run, don't all these trades feed down through wholesale gas sellers to Supplier buyers? If the market price is deflated or inflated, then we have seen the BG CEO explain that they simply take their wholesale cost then add their own Supplier costs plus £50 per customer (dual fuel)profit to establish the end price.

At no stage did he say,that BG would suffer the loss of any 'gambling' on the gas market and reduce the £50 profit per customer.

Why aren't we affected?

p.s. if we are not affected what is the purpose of all these trades?

ps. that's British Gas (part of Centrica) not BG Group.....

The reason is that energy companies are VERY DIVERSE....
Trading is a 'branch'.... profit/loss will eventually go to the consumer but this is at a group level (umbrella/holding company)....

For British Gas that includes Centricas E&P outside the UK..... (for example)

A simple explanation .... as you asked a poignant question.....

if we are not affected what is the purpose of all these trades?

Remember the Nescafe Gold Blend ads? (James Bond theme)
These were apparently spectacularly successful......
Gold Blend increased market share for only a few hundred million or billion in advertising costs...... (no idea of the real number except it must have been huge).....

The problem was most of that market share came from Nescafe Original customers..... part of Nabisco-Nescafe sub-division....

Each Business Unit is expected to show profit.... so Nescafe original made a series of ads showing if you own a record shop in Brighton how a cup of Original is your cuppa tea (or coffee)

Nescafe original spent hundreds of millions wining back some market share from its sister department!

Only a small percent was 'new customers to Nabisco'..... from another brand!

Energy Companies operate in the same way......
They have diverse portfolio's some high risk/high reward (like E&P) some low risk/low reward like domestic supply.

The purpose of the 'holding group' is to manage the risk portfolio.
Example:
BG Group recently sold its Brazil distribution network
http://www.bg-group.com/MEDIACENTRE/PRESS/Pages/6Nov2012.aspx

Press_Release wrote:

BG Group took the strategic decision to exit its Transmission & Distribution and Power businesses as an integral part of a portfolio rationalisation programme. Conclusion of the Comg!s transaction follows agreement in early October to sell BG Group’s controlling interest in India’s Gujarat Gas Company Limited for approximately $470 million and the sale in May of the Group’s interests in two Philippines power plants for $360 million.

Obviously for individual 'divisions' (like British Gas Supply) they want to remain profitable...if they are not then the group holding will simply sell them....(along with TUPE transferring employees or making them redundant)

Trading is just one of these 'divisions'. It's got more to do with world market share and future trading than power generation or domestic supply......

They simply buy and sell commodities.......some are there own and some are not.... the people who deal in them are traders... they have probably never met anyone in gas retail..... or power generation! Any more than a share trader might have met a pension fund trader on one side or a blue chip exec on the other.... they are simple intermediaries in a dark hidden world of trading.....

I have just been listening to David Cox who works for London Energy Consulting and is an expert in Gas Markets. He emphasised this is a very serious situation and the fact that the published example involves a price drop is not the significant issue. The benchmark prices used for many contract settlements are important because they involve buyers and sellers of gas at spot market or forward market rates.

I find it incredible that politicians and 'market experts' continue a head in the sand approach......
There is simply too much money involved for it NOT TO BE FIXED..... it's just no-one can come up with a better solution.....

As I said previously, it's like democracy.....
If anyone believes politics is not corrupt I can't help them!

We act surprised when it turns out politicians are claiming false and extrapolated expenses..... when this has been the case for decades.... (My mother worked as a PA to an MP years ago and this was normal back then)

This 'fixing' affects the energy market (just like a dump of wheat from the Ukraine onto the the European or Canadian market would.... )

The same goes for ALL trading.....
Insider trading is illegal.... but does anyone really believe its not happening EVERY DAY...... If it isn't then what do the traders base their decisions on and to some point what is the point?

We can't get rid of 'trading' (especially not the UK, what else do we have?) so it's a necessary evil.....

Manipulating the Gas Price takes place all the time, be it when a company decides to release a press release or hundreds of other ways.....

IMHO the whole system is corrupt (and like the few honest politicians the whole is marred by the rest).... BUT we don't have an alternative system so we (the politicians, watchdogs etc.) turn a blind eye!

backfoot

My recollection of how this works relates more to the electricity market. There was the pool spot price which varied continually depending on demand.

Alongside that, Supply business buyers would purchase tranches of capacity at predetermined prices from wholesalers.

There would be then be a settling up based on the spot price versus the contract price. This either resulted in a refund or further payment into the settlement system.

The bit covered by Contracts were shown as Contracts For Differences and obviously formed part of the purchase cost. So the efficency of this trading affected purchase cost and profitabilty of the Supply Business.

I presume the Gas market works broadly along the same lines. Isn't there a gas spot price wavering around, and this settlement organisation, monitor it and use the day end price to settle contracts for pre bought gas.

If that day end price has been fiddled then the Supplier buying costs will be affected.

I understand the Centrica structure. If this settlement market now in question is not part of the buying process, then there wouldn't be this fuss. It must be part of the relationship between gas wholesalers and gas suppliers.

What you seem to be suggesting is that there are separate Divisions of the Big 6 who have 'gambling' divisions, nothing to do with end users.

They may well have, but I still think that the whistleblowers allegations impinge on the Wholesale/Supplier interface and on end customer prices. If it doesn't, which gas market is dealing with that.

Pincher

With any commodity manipulation, you have to horde or dump the contracts. What if we sell short to increase supply. the price should crash, you then buy the contracts back. I wonder, instead of QE, what if Mervyn King sells energy contracts short? The market traders who are hording contracts will lose billions. I hope.

If traders do it it's called market manipulation, if the government does it, it's calling stabilising the market.

steve-L

backfoot wrote: »

My recollection of how this works relates more to the electricity market. There was the pool spot price which varied continually depending on demand.

Alongside that, Supply business buyers would purchase tranches of capacity at predetermined prices from wholesalers.

There would be then be a settling up based on the spot price versus the contract price. This either resulted in a refund or further payment into the settlement system.

Yes..... pretty much the same, but the same as any commodity trading.....

If that day end price has been fiddled then the Supplier buying costs will be affected.

No more than normal
The thing is its a microscopic amount compared to to other factors....such as artificially modifying the supply/demand (In oil OPEC do this as their declared reason to be)....

The whole thing is more akin to chaos theory.....
e.g. oil tanker is hijacked off somalia - destined for US oil generating power and purchased months earlier on a future....
This creates a high in spot gas in US and Canada....
This affects Centrica who own Direct Energy in New York....
http://www.centrica.com/index.asp?pageid=1041&newsid=2512
.... it also affects the whole energy business in a butterfly flapping its wings way!

But lets say a company pay a PR company to sell the idea that this year will be a hard winter to the public. Pure PR .... based on some dubious science.....
This will equally affect the spot and futures gas price
(I'm sure they wouldn't do that, would they?)

What you seem to be suggesting is that there are separate Divisions of the Big 6 who have 'gambling' divisions, nothing to do with end users.

Yes, although the 'gambling divisions' maintain its got some science behind it

They may well have, but I still think that the whistleblowers allegations impinge on the Wholesale/Supplier interface and on end customer prices. If it doesn't, which gas market is dealing with that.

It will just be lost in the chaos and lack of bearing on reality that is the energy market.

Why does a Tsunami in Japan lead to a change in policy of the European energy strategies?
Could a Tsunami hit the Upper Rhone Valley.... and if it did radiation would be the last worry..... half of Europe would disappear....

Yes there will be some affect on that particular transaction but that will be noise in the overall world energy market.

More worrying to me is that people are surprised this happened and people who know better are pretending to be surprised!

Again think politicians expenses.... yes its corrupt, utterly wrong ....
but how much did that measurably affect you compared to the rest of the misuse of tax? Even if your MP was taking a extra 1/2 million a year (and only the experts were doing that)..... it is only a few pence per constituent.....
Meanwhile general government mismanagement and incompetence (and I blame all parties equally) contribute to MOST of your tax and NI being misused.....

The MP's expenses are utterly wrong but a drop in the ocean...

Same goes for the price fix.....

backfoot

thanks Steve,

You obviously know a lot about these Commodity trades.What I wanted to understand and question was how it affected the end user or not.

We seem to have moved from, it doesn't affect the end user, to it does, but not to a significant level.

I don't think anyone knows, until the investigation has been done. Certainly it wasn't credible for me that people were saying it doesn't affect end users.I don't think Ofgem or the FSA would be up and running with it, if it was just Commodity Traders playing games. Have heard some of the Experts talking about the physical market which I take to mean the real buying of gas by the Suppliers.

Inevitably, we will see dividing lines between posters based on their view of the energy market before and after privatisation.Obviously, the allegations may produce further evidence that the market hasn't worked. Supporters of the status quo immediately rush to defend it and themselves well before the full facts are even produced or understood.

I note JD didn't answer what his expertise is for the original comments. Interestingly one of his threads was seeking an explanation of what Economy 7 was, yet now he can draw conclusions within hours, about the complex workings of the upstream gas market.It's a spectacular testament to our Education System.;)

grahamc2003

backfoot wrote: »

thanks Steve,

You obviously know a lot about these Commodity trades.What I wanted to understand and question was how it affected the end user or not.

My view is that they're not affected at all. While not officially controlled (like NGC), there's no doubt that profits for all players in the gas/electricity market are informally regulated - if they made a higher return on capital than the government/regulator liked, then the government/regulator would bring them into line (informally). The reverse is also true imv. The result of this 'informally regulated' profit is the large inefficiencies we see, the opposite of the intention of deregulation.

I really don't think there's anything in it for the gas/electric energy players by fixing prices - apart from jail if they're caught doing it. So no pros, and a serious con - why would they do it? Traders on the other hand could I suppose make millions if they could fix the price.

jd87

backfoot wrote: »

I note JD didn't answer what his expertise is for the original comments. Interestingly one of his threads was seeking an explanation of what Economy 7 was, yet now he can draw conclusions within hours, about the complex workings of the upstream gas market.It's a spectacular testament to our Education System.;)

I do work in this area, and for the same reasons as Steve-L, I can't go into any more detail than that. I'm not sure what Economy 7 thread you are referring to, care to post a link?

My point in this has only been that that impact on domestic prices by this "manipulation" is so insignificant it's really not worth the whole country getting all upset about it. The story has been blown out of proportion to give the government, the FSA, Ofgem and whoever the chance to be seen to be "doing something" about those big nasty energy companies when actually the guilty party here could just as well be a bank or a commodity trading company that most people on the street have never heard of.

As Steve-L has said, the price of gas is affected by so many other much bigger factors. The market really is very responsive to supply and demand, both in terms of the spot market and in futures, and you could say that the market was fixed from the very moment it was privatised and producers became free to keep supply at a level to suit their shareholders.

The only story here really is that the methodology ICIS are using the establish their index is flawed and open to abuse. Abuse that individual players can use to make a few quid, but nothing that is going to be noticable on your household bill. It's one bank making money at the expense of another bank, or the trading branch of an energy company improving their balance sheet at the expense of the producer branch of the same company. Yes ICIS need to improve the way they determine their index, or traders need to come up with a different way of pricing their long term supply contracts in future, something does need to change, but consumers haven't lost out here anymore than they are already losing out from the current system.

backfoot

jd87 wrote: »

I do work in this area, and for the same reasons as Steve-L, I can't go into any more detail than that. I'm not sure what Economy 7 thread you are referring to, care to post a link?

https://forums.moneysavingexpert.com/discussion/1035637=

So if you work in the area you are declaring an interest. Not that you aren't entitled to your views. Nevertheless, it is useful for readers to judge your comments against that background rather than from a customer viewpoint.

jd87

backfoot wrote: »

https://forums.moneysavingexpert.com/discussion/1035637=

Over 4 years ago, and I wasn't asking what Economy 7 was, I was asking about the meter and whether I should be on it. My "area of expertise" is not domestic electricity and I never said it was. Can we stick to the topic?