Explain two ways by which Amaranth might have manipulated natural gas prices in 2006
What will be an ideal response?
Manipulating Price Spreads by Affecting Storage: One way Brian Hunter may have manipulated natural gas prices was by bidding up winter 2006/2007 futures prices, which stimulated arbitrageurs to buy spot natural gas, store it, and sell the natural gas forward. Hunter bet that, by fall 2006, U.S. natural gas storage would be exhausted, causing natural gas to be dumped on the U.S. market, thereby lowering natural gas prices for fall 2006 relative to winter 2006/2007 prices.
Manipulating Prices by Playing One Exchange Off Another: Just before expiration of the March 2006 futures contract Hunter had short natural gas positions on NYMEX and ICE. He kept his large short position on ICE but reversed his short position on NYMEX and took a relatively small long position. During the last half hour of trading, he closed out all his long NYMEX contracts, thereby putting downward pressure on the price of NYMEX' March 2006 natural gas futures contract. The lower price hurt Amaranth's profits for the contracts Hunter sold on NYMEX, but it increased Amaranth's profits on his large short position on ICE. Because ICE took its final settlement price directly from NYMEX, Hunter's trades could have manipulated prices to his benefit.