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As Natural Gas Cools, Trading Sizzles - Research Paper Example

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Class: As Natural Gas Cools, Trading Sizzles Introduction The free-fall in the prices of natural gas over the last quarter of this year has had a surprise effect on its trading. For example, more investors have come in to cash on the plummeting commodity…
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As Natural Gas Cools, Trading Sizzles

Download file to see previous pages... The discussion explains this characteristic by use of the laws of demand and supply in relation to price. The discussion winds up by looking keenly into the words of Wall Street journal reports on the trade benefits if gas prices drop in the short term only to rise in the long term. Increased Trading and Investing Over the past 3 months, the prices in the natural gas have fallen by 53%, hence, revenues for the investors who had invested heavily then are very low. Surprisingly, with the fall in price, the industry has experienced more interest from traders of the commodity than it had witnessed last year at any one point. This has been explained by the fact that as prices have been falling; the transaction costs of the commodity have proportionately been falling too. Many of those investing today are basing their decision on the future expected increases volume in trading expected at 31% increase. The number of new contracts being signed went up to 2.53 million contracts representing a rise of 20% when compared to the same period last year (Cui And Dicolo). Explanation/ Analysis Some investors are investing in the value and the trend in the industry. As the prices continue falling, it is expected that the demand of the natural gas will go up and since the market is far from saturation, the investors want to heavily invest at least in the short run as trading continues plummeting. On the other side, some traders expect that this is the lowest price that the commodity can be traded and that soon, in the long term, the prices will go up and they can in the long run continue trading at the normal or even at a higher price (Cui and Dicolo). Therefore, this is bullish and a bearish market with benefits for both investors. The supplier has flooded the market especially with the newfound shale gas discovery. Since the demand of the natural gas was static with new discovery, the supply outstripped this demand lowering the prices. At 2 dollar’s range, many of the investors who are entering the market expect that with this rock-bottom state in the prices, they can continue trading at a loss or at least minimal returns on their investments because the prices will soon go up. However, analysts are warning that this may not be the rock bottom in essence. Last year, many investors speculated that then the prices were at their lowest only to be surprised that they dipped even lower this year. As Hyland explained, “just because the price of natural gas is trading at 2 dollars it should not automatically mean that they cannot go lower.” These words came true to one Mr. McLane the president of an asset management company who invested in the industry in the hope that the prices were at their lowest only for them to continue on a free-fall this year and he then had to close his position (Lowenstein 14). On the idea of trading on volatility, managers know that it may be profitable to ride in this wave of anxiety. More people are willing to invest in this anxiety than those who are quitting the market. Hence, with various guarantees, some firms are lending out funds to those who are willing to risk in the hope that future prices will go up. To them, it is not about how the bet will go only that whichever way it goes, they will reap their capital and the interest rates that they are lending at. These are the benefits that the capital markets are making out of this volatility. Just like every other ...Download file to see next pagesRead More
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