March 18, 2002; Testimonial to Natural Gas Futures

A widely anticipated collapse in natural gas price from unsold inventory being dumped after a warm winter has yet to occur.  One-year futures advanced further last week while six-year natural gas price leveled to $3.65 from $3.64 in the past week (see Chart).  Six-year oil price leveled to $22.41 from $22.43. 

We credit futures traders with a major constructive contribution to reducing potential waste in natural gas.  Historically the amount of natural gas in seasonal inventories has had an exaggerated influence on pricing just as corn and wheat supplies at the end of harvest season wreaked havoc on agricultural economics.  Futures trading in agricultural commodities made that industry more efficient by bringing together principals and speculators to set objective prices.  This winter we have seen the most dramatic evidence of the benefit of futures trading in natural gas and oil. 

There has been no natural gas price collapse in our opinion because any producer can see in the futures market that the commodity is more valuable if the holder can exercise minimal patience.  Normally we would have thought that the price for immediate delivery would have declined to less than $2.00 per mmbtu.  Indeed one-year futures bumped along at $2.50 in January and February.  Yet during that time six-year futures declined to no less than $3.00.  Now in the last two weeks one-year futures have zoomed past $3.00 partly closing the "contango" with six-year futures.

In our opinion the commodity price recovery is still in its early stages and we are enthusiastic about our recommended stocks.  At the same time investor interest may be shifting away from entities that have stressed their lack of exposure to commodity pricing.  The targets of our sell recommendations have not only emphasized that characteristic but go further in expropriating even ordinary inflationary adjustments.