Question:
The gas future price is collapsing… I’ve noticed a wide spread between October and December prices (almost 200 now, it’s usually 20/40). Do you have any clue about the reason for that? Would it be a good idea to go long on October and short on December?
Enrico from Gastown
Answer:
Enrico, I assume you mean “natural” gas in your question. Therefore, my answer will reflect this.
Even though the financial pundits are spinning their head over this, the fact is that the “collapse” in natural gas prices is nothing new. It happens with all commodities. Read the excerpt below from a 1992 NY Times article.
The collapse of natural gas prices in the last three months, to the lowest winter level in more than a decade, is giving the nation’s weakened oil and gas industry its worst jolt since oil prices fell by more than half in early 1986. By some measures, activity in the domestic oil and gas industry is at its lowest ebb since the Administration of Franklin D. Roosevelt.
Yes, I have a clue about why natural gas prices are falling. Read this excerpt from a more current NY Times article (August 21, 2009).
The sharp price decline of natural gas, to below $3 per thousand cubic feet from a peak of over $13 last summer, has been caused by a drop in demand from factories and homes because of the recession, coupled with a big expansion of domestic production over the last few years.
Should you go long on October and short on December futures? I don’t know, but I can say that falling natural gas prices coming into winter is one of the best things that could happen to an economy in recession, and that makes other markets more attractive for trading. Another excerpt says it best.
Even as it reflects weakness in the economy, the declining price of natural gas will be good for many industries and consumers. It is gradually bringing down utility bills for the 60 percent of American homes that use natural gas to fuel stoves, water heaters, furnaces and other appliances. And since natural gas is an important fuel for utilities and factories and a prime feedstock for the chemical and fertilizer industries, the price collapse helps cut their costs.
My advice? Our pending recovery presents so many opportunities to make money, why waste time stressing about this market?
Trade in the day; invest in your life …
