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Perhaps the most beautiful part of a free floating market like the one we have in commodities is the equilibrium it gives to the world. If a particular item is in very high demand, the price rises until some people stop demanding the product and equilibrium is reached with supply. The opposite is true if a particular item is not required by many people. In essence, the dynamic pricing of these items allows there to be constant equality between supply/demand, thus ensuring the minimization of shortages and oversupply. The goal behind investing then, is to predict where the equilibrium point will be in the future compared to where it is today. While in the long term, dynamic pricing allows an optimal ability to determine the value of a commodity, in the short term, large amounts of speculation can occur as to where that point is. This is only natural as the market must test many values and continuously decide where the fundamentals of supply and demand meet. A few months ago, the price of natural gas started to rise exponentially in response to already high energy prices. Hurricane Katrina then hit Louisiana, Texas, and the Gulf of Mexico which effectively produces 50% of the United States supply of gas everyday. At already exponential levels, the continuous calls for a cold winter have pushed speculators into the market trying to make a quick buck, as the price rose to over $15 per million Btus.
The number of speculators in the market though can be measured by the huge volatility in the price over the last several months. No matter how cold this winter gets, the speculators are unlikely going to press this market any higher and the equilibrium spot has yet to be determined. Stock levels of natural gas are high compared to the past five years, and as recovery from Hurricane Katrina continuous, new supplies may flood the market. In addition, there has been constant speculation of how high heating bills will be this winter, causing people to already lower their thermostats, putting a damper on demand. Natural gas, while perhaps the energy commodity of the future, is currently at a speculators level, and getting set for a large drop. While an entrance point to this market can not be ascertained yet, The Commodity Investor believes natural gas may drop to the $7 range before resuming its upward trend again. This would be a good entrance point for those looking to cash in on long term equilibrium adjustments for this commodity.
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