April 22, 2002; Price Charts Signal Natural Gas Buy

Natural gas price history for the past three years seems to fit a classic buy/sell pattern described by the moving average technique.  When one-year futures broke the moving average on the downside a year ago it was indeed an indicator of a change in trend.  Recently it looked like natural gas was going to break the moving average on the upside.  That has indeed happened.  Does that mean one-year natural gas futures will gradually reach $6.00 in a year?  No one can say.  We do believe that $6.00 is possible, even likely at some point in the next several years.  The upside looks greater than the downside and momentum is with us for now.

Referred to in industry jargon as the “12 month strip”, one-year futures represent the average of monthly quotes.  The current period of quotes covers May 2002 through April 2003.  We track closing prices on a day late in each week and compare the latest quotes to the average of the latest 30 weeks.  The period conforms roughly to widely plotted 200-day averages of stock prices.  Using one-year futures instead of daily cash prices reduces the distortion of seasonal factors.  For example, natural gas tends to be higher-priced in winter and refining margins tend to be higher in the spring. 

One-year futures can indicate the direction of stock prices, but are more volatile.  Six-year futures may more closely approximate stock prices by volatility.  Higher volume of trading in one-year futures may make them representative of a wider body of opinion than six-year futures.  The weekly plot of one-year and six-year futures for natural gas and oil that we have been running in Meter Reader in 2002 now appears in Natural Gas Royalty Trusts – A Weekly Analysis.