Reading the Term Structure

Natural gas prices have been rising recently. But I always like to look at the whole term structure of futures prices to get a better sense of what is really going on. My colleagues at CRA, Billy Muttiah and James Dunning, prepared this chart which overlays snapshots of the term structure at the start of the last several months. It tells a simple story.

Natural Gas Futures Prices - 12-05-2012

What’s going on is mostly a story about the long-run. Only a small amount of recent spot price changes are due to short-run factors and changes in the spot vs. futures price. Prices at all maturities have been going up. And the shifts are roughly parallel throughout the term structure.

A quick look like this doesn’t clarify whether it is long-run demand shocks, long-run supply shocks or any number of other combination of factors. But it does focus attention in the right place.

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