Tuesday, May 18, 2010

...if You Believe the Market

I've been watching natural gas spot prices closely the past couple of weeks (actually, the past couple of years, but who's counting?) and although there has been a lot of up and down, the volatility of the movements seems to be declining lately.  For the past couple of weeks, it's almost as if the price picks a direction, up or down, for the week and gradually moves in that direction for the rest of the week.  After the wild swings last year, it's kind of a relief, temporary I'm sure, to see fewer violent swings. 

The first quarter of this year started off promising, with prices rising above $6.50 (even to $7.51 one particularly cold day), but it's been a downhill slide since then.  Lately, it's flattened out, but has it hit bottom?  I'm not one to say, if only because I'm terribly superstitious.  So, I peeked at the futures prices to see where the market thinks today prices will be over the next year.  The chart below shows actual spot prices in blue from January 1, 2010 through last May 14, 2010 (averaged for the week) and a year's worth of futures prices for June 2010 through May 2011 in dark red.

Based on the futures prices, it all looks deceptively calm and slightly favorable for gas prices ahead. The reality, of course, will be much messier.  But if you believe the market, the price of gas will only barely break $5.50/MMBtu, but for a couple of months in the winter.  If this pattern is realized, it will continue to put pressure on gas producers.  Other prognosticators see prices from $4.50 to $7.50 over the next year.  Nobody has a crystal ball, but the futures market is the one place where the predictions are specific for a long period of time, though ever changing.

I'm no believer that the market knows all, but it is interesting to see where the people who are are paid to guess are putting their money.  It might be a fun experiment to track this graph over the course of the next year to see how reality (spot prices) match the projections (futures prices as of this arbitrary date).  Like I've got nothing better to do.

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