Economics: Natural Gas - And Another Bubble Popped

(Drivebycuriosity) - There is lot talk about bubbles. Many see bubbles on the stock market, housing market, credit market, debts, real estate and almost everywhere. Astonishingly the bubble callers don´t notice the real bubbles on the market for commodities. In the recent days the bubble for natural gas popped, following the oil bubble which imploded this fall. Since November the price for natural gas dropped from $4.80 to S2.97, about 40%, and followed the oil price which fell this autumn from $86 to $55 (driveby).

 (tradingeconomics)

Commodities like oil and natural gas are traded on financial markets where they are represented by financial futures. Their prices are heavily influenced by hedge funds and other speculators who are betting on price changes. Professional portfolio managers, including administrators of large funds, usually act as a herd. When their bros are buying or selling they are buying or selling too which amplifies the price movements. Last fall many traders speculated on rising natural gas prices. They bought financial futures on natural gas which pushed prices higher. Rising prices attracted more speculators, so-called momentum players. The herding behavior led to a snow ball effect and created a bubble on the market for natural gas.

The bubble popped in the recent days. It turned out that the demand for natural gas was not as high as the speculators expected and does not justify prices way above $3. In the recent days the natural gas speculation got disappointed by weather predictions. Weather pundits expect mild temperatures (around 40-50F, 5-10C) for the US east coast, the largest buyer of natural gas. As a result the heard skipped their bets and the bubble popped.