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March 16, 2005

Futures Shock

It's official:  oil prices just surged to a new record. 

Which makes it a good time to point out what a bad job the futures markets can do of predicting future prices--which, ostensibly, is what they're supposed to do best.  Take a look at the price trends for crude oil for December '05 delivery over the past 6 years (graph courtesy of Futuresource.com):

Oilfutures1205delivery_1From 1999 through mid-2003, the futures markets thought that oil would cost less than $25 per barrel this December.  Since then, the bet has risen to just over $55. 

Now, really, futures prices aren't actually predictions of the future; they're just a mechanism to help both buyers and sellers reduce risk, by locking in prices in advance. 

Still, it's worth noting that much of the time, people who look to the futures markets to predict the future are playing a sucker's game.

Posted by ClarkWD | Permalink

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