For Energy Investors, AGA Makes a Costly Mistake

The American Gas Association has some explaining to do.

Wednesday's steep upward revision of last week's surprising gas storage number left natural gas markets reeling and many commodity traders and analysts questioning the system. The selling pressure from late Wednesday carried over into Thursday morning, as the Philadelphia Stock Exchange Oil Service Index, or OSX, was down another point.

Every week, the AGA releases data about the current state of the natural gas market. Its natural gas inventory number is one of the most-watched pieces of energy information, eyed by commodity traders and energy investors alike. Oil and gas prices and energy stocks often move when the data come as a surprise -- like last week, when the AGA announced a much weaker-than-expected gas storage number -- only 3 billion cubic feet, or bcf, of natural gas injected into storage for the previous week vs. estimates of nearly 70 bcf.

That number was so out of line that analysts and investors initially couldn't believe it. While natural gas prices and energy stocks soared as traders reacted to the news, analysts were quick to seek assurances from the AGA that there were no kinks in the data. After all, while data collection is pretty straightforward, statistics like these are commonly tweaked the following week for accuracy.

The AGA's response: The data look solid, and it did not expect a revision in the coming week. Of course, revisions happen, but the AGA went out of its way to assure analysts this report was correct. "The AGA [said it] called all the reporting companies where the data looked suspicious, which is their common practice, and all the data was confirmed," said one analyst who sought confirmation of the data from the AGA.

That wasn't enough.

The Real Numbers

In the AGA's weekly data release Wednesday, it not only reported that gas storage increased to 86 bcf last week but also revised the 3 bcf report from the previous week to 50 bcf, up a whopping 47 bcf, or more than 1,560%.

The news sent natural gas prices into a near free fall, with the September New York Mercantile Exchange (NYMEX) contract falling through $3, closing at $2.85. Energy stocks felt the same pain. Exploration-and-production and energy-service stocks rallied Wednesday morning, only to give that up and more when the AGA announced the revision at 2 p.m. EDT. A look at the hourly chart of the OSX shows the clear impact the revision had on energy stocks. Companies like Apache (APA), Halliburton (HAL) and Burlington Resources (BR) all traded up nicely before Wednesday's data, only to be caught in the downdraft of the surprise.

OSX Reacts to Report Last Wednesday, the index soared on the AGA data. This Wednesday was another story.

The revision resulted from a reporting company changing its storage data, which are then provided to the AGA. The AGA relies on gas companies to accurately report weekly storage and then compiles the individual reports. The change is the largest ever as a result of a company's reporting revision.

While the AGA indicated it became aware of the problem shortly after last week's report, it said its policy is to wait until the following week's report to release revisions.

A Costly Mistake

If the revisions are technical and immaterial, that may be fine. In this case, not releasing such a material revision was costly. The decision also raises questions about the reliability and purity of the AGA's collection process and the data themselves.

"You worry about people manipulating the information they send in," says one senior natural gas analyst who asked not to be identified. "You are long gas, you fudge your numbers, and the aggregate storage data comes in low. Since the revision doesn't come out for a week, you have time to get out of your long positions before the correction comes."

While such manipulation would be considered at least unethical, the scenario isn't that far-fetched given the lag time in the correction, the difficulty in obtaining proprietary trading records and the AGA's insistence, at least in this case, in not identifying the company that made the error.

One trader at a major natural gas trading and marketing firm says the AGA needs to reassure its constituents that its data are credible. "Someone needs to take a serious look at this," he says. "The market certainly responded to that number, and many traders were burned. Someone could clearly use the system to manipulate the market. The AGA needs to do more homework before it publishes a number with such significant impact."

While formal regulation is both unlikely and unnecessary, AGA members are likely to demand more accountability of individual reporters and better quality assurance. "Enough AGA members probably got burned here that they will put pressure on the AGA to step up the quality of their own numbers," says Dan Pickering, director of research at Simmons & Co., a Houston energy investment boutique.

Let's hope so.

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For more on energy, check in this weekend as we present the latest edition of the semiannual TSC Energy Roundtable. Six energy pundits work to make sense of the topsy-turvy oil, natural gas and power markets, including their best ideas to make you money in the months ahead.

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