Natural Gas Spot Markets: How Accurate Are Reported Prices?

Because spot market prices generally are used to settle contracts, it is crucial that the reported prices accurately reflect market prices. For example, in the case of the New York Stock Exchange, all security sales and prices are recorded and promptly reported, and on most exchanges dealers are required to buy and sell at their posted bids and offers. In the case of natural gas, bids, offers, and prices are collected from traders by reporting firms. Bloomberg Energy Service, for example, reports only bids and offers. But unlike exchange dealers, traders are not required to honor them. Consequently, bids and offers may not be accurate indicators of the actual range of sales prices on natural gas spot markets.

The reporting firms base their price estimates on informal polls of traders. Their responses to a FERC inquiry confirm that traders are under no obligation to report and their reports are not verified except by comparison with other reports. None of the reporting firms publishes the sample sizes or trade volumes associated with their reported prices. Similarly, there is no estimate of total trading volume through the day. Each reporter also has different conventions for defining precisely what is meant by “price.”a Consequently it is not surprising that the reporters differ as to what the price is at any particular time and place. Indeed, as detailed in Appendix C, the differences in reported prices can be large.

The firms do not assert that the numbers are accurate. The following are typical disclaimers: “. . . [NGI] . . . makes no warranty as to the accuracy of these numbers . . .”;b and “Platts cannot . . . insure against or be held responsible for inaccuracies . . . .”c Accordingly, NYMEX makes provision for traders to protest reported prices that they dispute. Designing risk-sharing instruments when the reported prices are themselves of uncertain quality and the trading volumes are not known is a challenge.

aFederal Energy Regulatory Commission, Investigation of Potential Manipulation of Electric and Natural Gas Prices, Docket No. PA-02-2-000 (Washington, DC, August 2002), pp. 32-57.

bNGI Daily Gas Price Index (February 4, 2002), p. 9.

cPlatts, Gas Daily (February 4, 2002), p. 2.