by Tiome Reed –
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.
If you have a newspaper that lists commodity future prices, or if you have access to the internet, you can follow futures market prices to predict which way gasoline prices are headed and by how much.
Examples of websites that provide commodity futures prices include 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 stanards) at a given price on a given date at a specified place. Commodity futures 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 prior to 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/bu. on August 24.
Cash prices at the pump tend to follow the futures market price. I’ve noticed it usually takes 2 to 5 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 matures (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 about 55 to 60 cents less than the pump price. On Friday, August 19 we were paying the highest prices ever for gasoline. In this area the lowest price I could find was $2.539/gallon. This price was likely tied to the closing price of the September 2005 futures contract on Tuesday August 16 when the closing price peaked at $1.98/gallon.
During the next two days August 17 and 18, the futures price fell by 12¢, then on Friday August 19 it rose by 4¢ to settle at $1.90/gallon. I noticed the price of gas fell 3¢ to $2.509/gallon at one station on Saturday, August 20, 4 days after the futures price declined. The gas price at another area station was $2.479 per gallon on Monday, August 22. The difference of 6 cents/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¢/gallon over a one to 2 day period you may win by filling up ahead of the probable pump price rise. When the futures price decreases 10¢/gallon don’t buy gas until the price drops if you can wait long enough.
As a final note, the futures market at noon on Wednesday, August 24 was showing an anticipated decline in unleaded gasoline prices of 5.5 cents by late September and a drop of 8 cents by late October.
Let’s hope that this holds true.
Source: Cleburne News