Predicting Short Term Gasoline Prices
How do you know today if gasoline pump prices will be higher or lower tomorrow? You can follow commodity futures prices to help predict if gasoline prices will rise, fall or remain the same, especially in the short term.
You can follow commodity future prices in the newspaper or on the Internet to predict which way gasoline prices are headed and by how much. Two Web sites that provide commodity futures prices are alaron.com and ino.com. These sites provide the daily price fluctuations for unleaded gasoline on the New York Mercantile Exchange where energy futures contracts are traded.
Commodity futures markets in one way are similar to casinos in that they allow individuals to gamble on which way the prices of a lot of basic commodities are headed. Fortunes are made and lost on a regular basis by speculators and investment funds that assume positions in the futures markets. Speculators generally do not intend to make or take delivery of the commodity on whose price they gamble. They close out their position before the expiration date of the futures contract and take their profit or loss.
Commodity futures markets or exchanges allow individuals to buy or sell contracts, which state that they will make delivery or take delivery of a certain number of units of a commodity (that meet certain quality standards) at a given price on a given date at a specified place. The markets are extremely important because they provide a mechanism for the actual producers and users of most basic commodities to manage their risks by allowing producers and users to lock in the price at which they will buy or sell a commodity at a future date. For example, a soybean farmer will usually use the November soybean futures contract to forward sell his anticipated soybean crop before harvest if that price is acceptable. Farmers who used the futures market to forward price soybeans on June 22 of this year were able to lock in a price above $7.50 per bushel. They were able to do this because a Midwest drought had led many to believe there would be a significantly reduced soybean crop at harvest and the price of the November soybean futures contract had risen from the $6 trading level in late May. Since then, yield estimates have improved and farmers who did not forward price their soybeans were looking at harvest time price of about $6.10 per bushel on Aug. 24.
Cash prices at the pump tend to follow the futures market price. It usually takes two to five days for the price at the pump to catch up with the front month futures market contract price. Stations generally change the price when they get a new delivery of gas. September 2005 is the current front month contract and it is by definition the contract month closest to maturing. When the September 2005 contract expires at the end of August, the October 2005 gas contract will become the front month contract and it will be then become the contract to use to predict pump price changes.
The price of the front month unleaded gas futures contract recently has been 55 to 60 cents less than the pump price.
On Aug.19, we were paying the highest prices ever for gasoline. In North Alabama, the lowest price was $2.53 per gallon. This price was likely tied to the closing price of the September 2005 futures contract on Aug.16, when the closing price peaked at $1.98 per gallon. During the next two days Aug. 17 and 18, the futures price fell by 12 cents, then on Aug.19, it rose by 4cents to settle at $1.90 per gallon. The price of gas fell 3 cents to $2.50 per gallon at one station on Aug. 20, four days after the futures price declined. The gas price at another area station was $2.47 per gallon on Aug. 22. The difference of 6 cents per gallon between the high price and the lowest price would have saved a driver $1.20 for a 20-gallon purchase.
If you follow the futures market price you can increase your chances of paying less for your gas. When the futures price increases 10 cents per gallon over a one- to two-day period, you may win by filling up ahead of the probable pump price rise. When the futures price decreases 10 cents per gallon, don
Posted by Jim Langcuster at August 25, 2005 10:19 AM